Drawing false inferences from mandated disclosures

Abstract

AbstractDisclosure mandates are pervasive. Though designed to inform consumers, such mandates may lead consumers to draw false inferences – for example, that a product is harmful when it is not. When deciding to require disclosure of an ingredient in or characteristic of a product, regulators may be motivated by evidence that the ingredient or characteristic is harmful to consumers. But they may also be motivated by a belief that consumers have a right to know what they are buying or by interest-group pressure. Consumers who misperceive the regulator's true motive, or mix of motives, will draw false inferences from the mandated disclosure. If consumers think that the disclosure is motivated by evidence of harm, when in fact it is motivated by a belief in a right to know or by interest-group pressure, then they will be inefficiently deterred from purchasing the product. We analyze this general concern about disclosure mandates. We also offer survey evidence demonstrating that the risk of false inferences is serious and real.