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Networks, the Internet, and Cloud Computing, Internet and Search and Advertising

Article Snapshot


Luis Rayo and Ilya Segal


Journal of Political Economy, Vol. 118, No. 5, pp. 949-987, 2010


This paper looks at how much information media that display ads reveal to consumers about the ad’s usefulness.

Policy Relevance

Media that display information such as ads to consumers will tend to mix useful ads with ads that increase profits, so long as no ad is both profitable and useful.

Main Points

  • Platforms that display ads sometimes (“senders”) sometimes make more profits if they do not reveal to consumers (“receivers”) that the ads are of little value to the consumer.
    • This kind of economic problem arises often, such as when a school might choose not to reveal full information to employers about students’ abilities.

  • Sites that display ads online must choose when to pool ads that raise their profits with ads that are really of value to consumers; they also must choose how much to charge advertisers for displaying the ads.

  • In the short run, a sender might try to fool users into relying on ads that raise their profits without helping the user, but this will harm the sender in the long run because users will stop using it.

  • When one ad is more valuable, but another ad is more profitable, the sender will tend to show both to the receiver, a type of “bait and switch.”
    • If one ad has a negative profit but a high value, the sender might include it grouped with a high-profit ad.

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