Is No News (Perceived as) Bad News? An Experimental Investigation of Information Disclosure

by Ginger Jin, Michael Luca & Daniel Martin

Overview — Truth-in-advertising laws stipulate that companies cannot provide misleading or incorrect information to customers. Even so, businesses typically decide how much or what kind of information to disclose to buyers. When a business chooses not to disclose information, customers must then infer whether no news is good news or bad news. Through a series of experiments, this paper shows that consumers systematically underestimate the extent to which no news is bad news, and sellers take advantage of this by strategically withholding unfavorable information.

Author Abstract

A central prediction of information economics is that market forces can lead businesses to voluntarily provide information about the quality of their products, yet little voluntary disclosure is observed in the field. In this paper, we demonstrate that the inconsistency between theory and reality is driven by a fundamental failure in consumer inferences when sellers withhold information. Using a series of laboratory experiments, we implement a simple disclosure game in which senders can verifiably report quality to receivers. We find that senders disclose less often than equilibrium would predict. Receivers are not sufficiently skeptical about undisclosed information-they underestimate the extent to which no news is bad news. Senders generally take advantage of receiver mistakes. We find that providing disclosure rates by quality score helps to improve receiver inferences.