Drawing false inferences from
mandated disclosures
OREN BAR-GILL*
Harvard Law School, Cambridge, MA, USA
DAVID SCHKADE
University of California, San Diego, Rady School of Management, La Jolla, CA, USA
CASS R. SUNSTEIN
Harvard Law School, Cambridge, MA, USA
Abstract: Disclosure mandates are pervasive. Though designed to inform
consumers, such mandates may lead consume rs 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 ineffi ciently 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.
Submitted 6 November 2017; accepted 14 November 2017
Introduction
Red Auerbach, the late, great coach of the Boston Celtics, liked to say, “It’s not
what you say; it’s what they hear.” What do consumers “hear” when the gov-
ernment mandates the disclosure of a certain ingredient or characteristic of a
product? Our argument, in brief, is that consumers often hear something
very different from what the government intends to convey. The result can
be a serious welfare loss, with harms to producers and consumers alike.
* Correspondence to: Oren Bar-Gill, Harvard Law School, Cambridge, MA, USA. Email: bargill@
law.harvard.edu
Behavioural Public Policy (2019), 3: 2, 209–227
© Cambridge University Press doi:10.1017/bpp.2017.12
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In many cases, consumers hear, “DANGER! DON’T BUY!” That may be
precisely what the government wants consumers to hear. In such cases, the gov-
ernment concluded, on the basis of scientific evidence, that the relevant ingre-
dient or characteristic is harmful to consumers, and it is using the disclosure
mandate to convey this information and reduce demand for the harmful
product – think cigarette labels .
In other cases, however, the government does not want to send a
“DANGER!” signal. There may be no scientific basis for concluding that the
ingredient or characteristic is harmful. The disclosure mandate may be moti-
vated by a belief that consumers have a right to know (RtK) what they are
buying, whether or not the ingredient or characteristic is harmful. Or it may
be motivated by interest-group pressures. Or, perhaps, there is some prelimin-
ary evidence of possible harm, but far from enough to merit a “DANGER!
DON’T BUY!” warning; only, maybe, a much weaker message: “Some
Preliminary, Inconclusive Cause for Concern. Not Sure If You Should Buy or
Not.” Or government may be recognizing some kind of social value (say, on
behalf of products bought in the country in which they are sold, or products
with certain national origins) or moral commitment (say, on behalf of
animal welfare or natural products), which has nothing to do with health risks.
The problem is that, in these cases, consumers may hear “DANGER!” even
though the government does not mean to issue a “DANGER!” warning at all.
The concern is that the mandatory label would mislead consumers, thus produ-
cing a welfare loss. We study the inference problem that consumers face when
the government decides to mandate the disclosure of an ingredient or charac-
teristic of a product. Our analysis establishes that consumer’s post-d isclosure
beliefs about the product are influenced by: (1) the consumer’s pre-disclosure
beliefs; (2) the consumer’s estimate of the accuracy of the government ’s infor-
mation; and (3) the consumer’s beliefs about the government’s motives.
The consumer’s pre-disclosure beliefs play a critical role. Suppose that
before learning of the government’s decision to mandate disclosure the con-
sumer is fairly certain that the ingredient or characteristic is harmful. If so,
the disclosure mandate will have a minimal effect on the consumer’s post-dis-
closure beliefs (and perhaps none at all). Similarly, if, pre-disclosure, the con-
sumer is fairly certain that the ingredient or characteristic is harmless, then
again the disclosure mandate will have a minimal effect on the consumer’s
post-disclosure beliefs (and perhaps none at all). In essence, when consumers
are already well-informed, or think that they are well-informed, the additional
signal derived from the government’s decision to mandate disclosure carries
little weight.
In contrast, when, pre-disclosure, consumers are uncertain about whether
the ingredient or characteristic is harmful or not, the government’s decision
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to mandate disclosure will carry more weight. This means that we should be
most worried about potentially misleading decisions to mandate disclosure
when many consumers are uncertain about whether the ingredient or charac-
teristic is harmful. In many areas, consumers, or a large number of them, are
indeed uncertain, because the underlying questions are technical, complex or
subject to competing (but apparently plausible) interpretations.
The perceived quality or accuracy of the government’s evidence about
whether the ingredient or characteristic is harmful also affects the consumer’s
post-disclosure beliefs. When the government is thought to have superior infor-
mation, the decision to mandate disclosure will naturally carry more weight. It
follows that the perceived professional expertise of the government agency that
decides to mandate the disclosure will affect the inferences that consumers
draw from any such mandate. And this is all as it should be: consumers
should give more weight to the government’s decision to mandate disclosure
when they believe that the government has better information and greater
expertise. The concern that a disclosure mandate will mislead consumers
arises when consumers over- (or under-) estimate the quality of the govern-
ment’s information or its level of professional expertise.
Finally, and perhaps most interestingly, the government’s perceived motiv-
ation for mandating disclosure will critically influence the inferences that con-
sumers draw from a decision to mandate disclosure. If consumers think that the
government requires disclosure because it found that the product is harmful,
then they will be more likely to revise their beliefs about the product ’s harmful-
ness. If, by contrast, consumers think that the government requires disclosure
because it believes in a RtK or because it succumbed to interest-group pressure,
then they will be less likely to revise their beliefs about the product’s harmful-
ness. Again, this is all as it should be. The concern, and our central focus here, is
that a decision to mandate disclosure will mislead consumers. This concern
arises when consumers misperceive the government’s motives – for example,
if they think that the government decided to mandate disclosure because it con-
cluded that the product is harmful, when in fact the disclosure mandate was
motivated by a belief in a RtK.
In this paper, we analyze the factors that influence the inferences that consu-
mers draw from a disclosure mandate, both theoretically and empirically. In
particular, we measure the effect of inferred motives on the inferences that con-
sumers draw from mandated disclosures. Empirically, we confirm that consu-
mers’ beliefs about product risk increase when they think that the disclosure
mandate was motivated by new research, but not when they think that the
mandate was driven by political pressure. We obtain more subtle empirical
results when consumers think that the government chose to mandate disclosure
because it believes that consumers have a RtK what they are buying. Puzzlingly,
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but importantly, consumers who attribute to the government a RtK motive
seem to perceive a higher level of risk. It appears that these consumers are
incorrectly conflating a RtK motive with a new evidence of risk motive.
We are especially concerned about updating that leads to false inferences
about product risk. Such false inferences will occur when consumers attribute
the wrong motive to the government’s decision to mandate disclosure. In par-
ticular, consumers will wrongly increase their estimate of product risk if they
wrongly think that the disclosure mandate was motivated by new research
finding that the product is harmful, when in fact the government’s motives
were very different. In the genetically modified organism (GMO) context,
where the actual disclosure mandate was not motivated by such new research,
our survey results suggest that about 50% of consumers attribute a false motive
and thus draw false inferences (the 50% figure includes consumers who attri-
bute a RtK motive but think that a RtK is important because there is evidence
of risk). We also confirm empirically that the magnitude of the false inference
problem is inversely correlated with the strength of the consumer’s prior, pre-
disclosure beliefs about product risk.
What are the welfare costs of the false inferences that we identify?
Quantification is challenging, but in qualitative terms, the answer is obvious:
false inference leads to misperception of risk, and misperception of risk distorts
consumers’ purchase decisions.
1
The general arguments about false inferences from disclosure have implica-
tions for the intense and continuing debate about the labeling of genetically
modified (GM) foods. In Europe, and increasingly in the United States, there
is considerable public concern about GMOs and about food that contains
them (GM food) (see Weirich, 2007). In response to this concern, governments
have given serious consideration to the idea of requiring GM food labels, and
some, including the United States, have already done so through legislation (see
Pub. L. No. 114–216, § 1, 130 Stat. 834 (2016) (codified at 7 U.S.C. § 1621 et
seq.)).
This paper adds to the growing literature on the benefits and costs of man-
dated disclosure. For a skeptical view on the overall merits of mandated dis-
closure as a regulatory technique, see Ben-Shahar and Schneider (2014). For
a less skeptical view, see Loewenstein et al. (2014) and Bar-Gill (2012).
More specifically, this paper formalizes and provides empirical support for a
claim made by opponents of GM food labels – that GM labels might
1 We note, however, that, given the prevalence of pre-disclosure and pre-inference mispercep-
tions, false inferences are not necessarily welfare reducing. For example, if, pre-disclosure, the relevant
risk was underestimated, then a disclosure mandate can efficiently reduce the underestimation.
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affirmatively mislead some or many consumers by leading them to believe,
falsely, that GM foods pose risks to health or the environment, when in fact
the scientific consensus is that no such risks exist (see, e.g., Pinholster, 2012).
Most closely related to our work is the unpublished manuscript by Zhang
(2014). Zhang reports an interesting initial empirical study showing that
people perceive higher risk following a GMO disclosure mandate (compared
to no action). Our study includes (and replicates) this effect, also adding
warning as a possible action. In addition, we examine the effect of the govern-
ment’s motive (stated and perceived), how this interacts with government
action, how prior assessments are updated after learning the action and
motive, effects on purchase intentions and a comparison of the pattern of
effects for GMOs to those for a made-up ingredient (Z25).
The remainder of this paper is organized as follows. The next section devel-
ops the general theoretical argument about false inferences and derives the con-
ditions under which mandated disclosure is more or less likely to result in a
false inference. (The more technical analysis is relegated to the Online
Appendix.) The subsequent ‘evidence’ section describes results from our
survey study that confirm the theoretical predictions. The final section offers
some concluding remarks.
Drawing false inferences: theory
We now present the False Inference theory. Consumers hold some prior beliefs
about the dangerousness of a product or a product feature (as we shall call it,
for shorthand). Upon learning that the government decided to mandate (or not
to mandate) disclosure of this feature, consumers update their beliefs. This
updating or inference process can bring consumers’ estimates of product risk
closer to the actual, scientifi c risk measure. But under conditions that we
specify, the updating process can drive the consumer’s estimate further away
from the objective truth. This is what we call “false inferenc e. ” In particular,
we show that false beliefs about the motivation behind the government’s deci-
sion to mandate disclosure often result in false inference.
Framework of analysis
Suppose that a consumer is choosing between two food products, A and
B. Product A carries a government-mandated “Contains Z25” disclosure.
Product B does not. The consumer wants to purchase healthy food products.
But she is uncertain about the health effects of Z25. For expositional purposes,
we assume that there is a particular health risk, H (measured in dollars), that is
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