2024 Theses Doctoral

Innovation and Welfare Impacts of Disclosure Regulation: A General Equilibrium Approach

Yang, Li

I develop a general equilibrium model to examine the innovation and welfare effects of expanding mandatory financial disclosure to a broader set of firms. In the model, disclosure by relatively small firms reveals proprietary information about their local markets, which helps larger firms enter and compete. Consistent with previous empirical findings, the model predicts that mandatory disclosure encourages (discourages) innovation by larger (smaller) firms.

More importantly, I identify conditions for when expanding the scope of disclosure regulation increases aggregate innovation and/or welfare. I structurally estimate the model using innovation data and plausibly exogenous variation in the extent of disclosure regulation in Europe. My estimates suggest that subjecting 15% more firms to full reporting requirements decreases aggregate innovation by around -0.26% but increases welfare by around 1%. This disparity is driven by the fact that production shifts to larger firms that innovate less but are more efficient in exploiting the fruits of innovations.