Optimal Disclosure When There are Penalties for Nondisclosure
We study a seller of an asset who is liable for damages if, after the sale, the seller is found to have withheld an estimate of the asset's value from potential buyers of the asset prior to sale. Among our results, we show, perhaps surprisingly, that as either the "damages multiplier" that determines the size of the damages the seller must pays buyers increases, or as the probability the seller is caught withholding the estimate from buyers increases, the seller discloses his estimate less often. Also, as the precision of his estimate increases, he sells a larger fraction of the asset.
Dye, Ronald A.. 2017. Optimal Disclosure When There are Penalties for Nondisclosure. RAND Journal of Economics. 48(3): 704-732.