Optimal Disclosure Mandate in Supply Chains

Abstract

We study a model in which a firm can acquire conclusive evidence about its supplier's social and environmental impacts. We identify the disclosure mandate that maximizes market information. A disclosure mandate determines whether (i) the firm's investigation effort is observable by the market and (ii) obtained evidence is disclosed to the market. When the supply chain visibility is low, the firm does not know its supplier's impacts. The combination of covert investigation and voluntary disclosure of obtained evidence incentivizes the firm to acquire evidence and constitutes the optimal disclosure mandate. When the supply chain visibility is high, the firm knows its supplier's impacts. Overt investigation and mandatory disclosure of obtained evidence together enable the firm to signal its private knowledge through the chosen investigation effort and maximize market information. The sharp contrast of these two cases highlights the importance of supply chain visibility in determining the optimal mandate.