The Journal of Law & Economics2013-09-05 2:57 AM

JSTOR: Journal of Law and Economics, Vol. 56, No. 2 (May 2013), pp. 453-486

Abstract: This paper explores the differences between policies prohibiting false claims about product quality and policies requiring adequate prior testing to substantiate specific claims of quality. It develops a model in which firms have private information about their type—represented by their probability of having a high-quality product—and can acquire additional private information about their product quality through costly testing and learning. Penalties for false claims and for unsubstantiated claims create an opportunity for firms to credibly reveal their information and for signaling to emerge in equilibrium. I show that the two kinds of penalties affect the possibility of signaling in different ways and that the mandatory substantiation requirement in many circumstances improves buyer information and social welfare beyond what is achieved by a ban on false claims alone.

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The Journal of Law & Economics

The Journal of Law and Economics is an academic journal published by the University of Chicago Press. It publishes articles on the economic analysis of regulation and the behavior of regulated firms, the political economy of legislation and legislative processes, law and finance, corporate finance and governance, and industrial organization. The journal is sponsored by the University of Chicago Law School.

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