Prohibitions on False and Unsubstantiated Claims: Inducing the Acquisition and Revelation of Information through Competition Policy

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.