Warning Labels as Cheap-Talk: Why Regulators Ban Drugs

Abstract

One explanation for drug bans is that regulators know more than consumers about product quality. But why not just communicate the information in their ban, perhaps via a “would have banned” label?Because product labeling is cheap-talk, any small market failure tempts regulators to lie about quality, inducing consumers who suspect such lies to not believe everything they are told. In fact, when regulators expect market failures to result in under-consumption of a drug, and so would not ban it for informed consumers, regulators ex ante prefer to commit to not banning this drug for uninformed consumers

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