The Value of Silence: Optimal Disclosure Default Rules in Contract Law

Sellers are generally required to disclose “negative” information about hidden defects of the products they sell. By contrast, buyers are generally under no comparable duties to disclose “positive” information about hidden qualities of the products they buy. The leading explanation for the law’s disparate treatment of buyers and sellers is that imposing disclosure duties on buyers would undermine their incentives to acquire costly (but socially useful) information prior to the purchase. This explanation lacks a key step: the failure to correct asymmetric information problems ex post would cause an inverse adverse selection problem ex ante. Uninformed sellers would withdraw from the market and resources would not move to higher-valuing (informed) buyers. In this paper, we develop a model that balances the benefits of information acquisition with the costs of asymmetric information, and study the incentives created by disclosure and non-disclosure rules. We show that when parties can contract around defaults at a cost, the choice of alternative disclosure rules makes a difference. Unlike disclosure rules, non-disclosure default rules yield partially separating equilibria that preserve the buyers’ incentives to acquire information and foster trade opportunities between expert buyers and uninformed sellers.