Warning Labels as Cheap Talk: Why Regulators Ban Products

1. Warning Labels as Cheap Talk:Why Regulators Ban Products Robin Hanson RWJF Health Policy Scholar UC Berkeley

2. Outline • Why product bans are a puzzle • Existing theories of bans: info & “bias” • A cheap talk theory • Game theoretic model • Numerical details of an example • General theorem • Applications

3. Banned Products Health & Safety: foods, drugs, devices; blood, baby, organ sales; buildings, planes, cars, jobs, mowers Finance: usury, gambling, stocks, insurance, futures Law: limits on freedom of contract Professional licensing: above + education, child care Prostitution, pornography, minimum wages, ... Required “purchases” of health, savings, education Parents ban children’s drinking, driving, dating

4. Quality-Dependent Demand Price Demand Supply Q Quantity

5. Regulator “Bias” Regulator Information Theories of Bans

6. Q Quality-Dependent Demand Price Demand Supply Q Quantity

7. If No Information Social Loss Best Quantity

8. Ban Beats No Info Social Loss Best Quantity

9. Ban Beats No Info,But Not Label Social Loss Best Quantity

10. Regulator Information Expensive Labels Regulator “Bias” Irrational Consumers Captured Regulators Market Failures => Over-consume Combine Info & “Bias” => Cheap talk Theories of Bans

11. Wants more “health” if Signal status, that care Contagion externality Self-control problems Wants less “health” if Insurance subsidy Drug scandal aversion Regulator “Bias” vs. Market Could Go Either Way • Uncompetitive market • Irrational consumers • Regulatory capture

12. Cheap Talk Theory of Bans • Only care consequences => labeling is cheap talk. • Small regulator bias => large consumer skepticism. • If really worst quality, would rather ban. • If can ban, not ban taken as quality endorsement. • Compare games: Are bans a commitment failure?

13. Game Theory Equilibria • A game (or “story without fools”) is • A tree of possibilities, branching at each choice • Value each player places on each final outcome • What each player knows at each of her choices • A player’s strategy says what to choose at each of her choices • An equilibrium is a strategy set where no player can do better, given others’ strategies

14. The Ban or Label Game 1. Regulator sees consumer’s ideal quantity Q. Consumers only know prior over possible Q. Regulator’s ideal quantity is Q + Bias(Q). 2. Regulator bans (Q = “0”) or says label L. 3. If no ban, consumers infer Prob[Q | L], which determines amount they buy Q. Simulate: constant bias, uniform prior, preferences quadratic in difference between Q & ideal Q

15. Q Fully Revealing Cheap Talk? Q Bias = Lie if Believed The Regulator: 0 1 The Market:

16. Cheap Talk Equilibria The Regulator: Q0 Q1 Q2 Q3 0 1 Q1 Q2 The Market:

17. Cheap Talk Equilibria U Reg. (Q,Q2) The Regulator: Bias Q0 Q1 Q2 Q3 0 1 Q1 Q2 = E[Q|[Q1, Q2]] The Market: F’(Q)

18. Boundaries Qi Bias Boundaries Without Ban No Ban (constant bias, uniform prior, quadratic preferences)

19. Boundaries With Ban Ban Boundaries Qi Banned Products Bias

20. Who Wants What Before Game Players: two competing producers, consumers, regulator Assume: competitive markets, linear supply & demand Everyone wants no bans, small bias, except: • Competing producers want bans, and given bans, want regulators biased toward them. • Regulators biased against product want bans. (So prohibiting bans aligns incentives to reduce bias.)

21. General Theorem Translated Bans worse if wouldn’t ban for informed consumers

22. Theorem: bans bad if not with bias

23. Applications • unsanitary food processing => ban • losses to bad investments => ban • smoking kills => warning label • saccharine concerns => warning label • violent TV concerns => V-chip labels Story: Govt. gets new info => ban or label, (depending on info, perceived bias) Not Explain: rock climbing, prostitution

24. Cheap Talk Explains • political debates focused on quality level • why bans focus on new unfamiliar harms • why consumers ignore fine label info • why no exceptions for special stores or tests • why voters re-elect politicians who ban • large rates of banning, with small bias • banning by those biased in favor of product

25. “Bias” of Regulators Health over fun, status Saving over spending Contracts over trust Hire over do by self? Pro reading, anti TV With: Medicare, Weed Not: Medicine, Vitamin With: Social Security Not: Shady investment Not: Limits on contract Not?: Profess. License Explains 1st Amendment & not extend to TV Which Bans Not With Bias?

26. Constitutional Liberalism • Repeated game, can be in ban or no-ban regime. • New i.i.d. signal each period • Knowing signal, regulator can switch at some “constitutional” cost. • Two period delay to learn of switch, unless actually see ban. • In no-ban regime, tempted to switch when bad signal. • In ban regime, fear bad signal next period if switch. • Consumers unsure of regime, makes bans more tempting. • Need long-term view for frequent no-ban regimes.

27. In Summary • Regulator “bias” & info theories, combined, roughly explain banning behavior. • Bans may frequently be commitment failure. • Proved is for regulator biased toward product. • Whether is for regulator biased against product depends on degree of capture vs. market failure.