Policy and Inference: The Case of Product Labeling

Consumers may infer a policy maker’s private information about relevant economic variables from its policy choice. I study this inference effect and its policy implications in the context of mandatory product content disclosure. I find that mandatory disclosure does not always benefit consumers. For example, by observing the government’s requirement to label genetically modified organisms (GMOs) in food products, consumers may infer that GMO safety is of enough concern, which leads to insufficient consumption. On the other hand, the lack of mandatory disclosure may send a falsely optimistic signal of GMO safety to consumers, which leads to excessive consumption. Optimal disclosure policy should take into account both the transparency of product content and consumer inference of content quality. Interestingly, higher disclosure implementation cost may broaden the scope of mandatory disclosure and may even increase social welfare. An experiment shows that emphasizing GMO disclosure does worsen consumers’ perception of GMO safety.