DISCLOSURE DECISION IN AN ENTRY GAME WITH COSTLY INFORMATION INTERPRETATION

Abstract

This paper analyzes a firm’s incentives to disclose private information related to its market situation when there is a potential competitor. However, I adopt a more realistic definition of transparency that has been mostly overlooked by the earlier literature. In a realistic situation, financial transparency does not imply that all the relevant information are automatically transmitted to the receiver of the signal but instead the available information needs to be understood. When the model is adjusted to incorporate this realistic definition of transparency, fully revealing equilibrium associated with the “Revelation Principle” does not exist anymore. It is observed that the model with interpretation costs of transparency yields both pooling and partially pooling equilibria.