Faculty Bibliography

Racial residential segregation is a crucial aspect of the persisting racial inequality in the United States. We reexamine this enduring problem from a novel perspective, exposing the relationship between segregation and contract duration. In the housing context, the main contract duration decision involves the choice between buying (long duration) and renting (short duration). And this choice can affect, and be affected by, the racial composition of a neighborhood. If, because of discriminatory misperceptions based on mistaken stereotypes or discriminatory preferences, moving into a racially diverse neighborhood is perceived by some white people to be a riskier or otherwise less preferred alternative, then (i) a white person moving into such a diverse neighborhood would be more likely to rent than buy and (ii) a white person who is intent on buying would be likely to choose a less-diverse, predominantly white neighborhood. To empirically explore the relationship between contract duration and segregation, we apply two methodological approaches: First, we analyze rich survey data collected by the Bureau of Labor Statistics, which cover 8,984 individuals who were surveyed annually over a period of seventeen years, including about their housing decisions. Second, we run online, incentivized trust-game experiments (N = 763 across all experiments) to study the relationship between duration choices and partner choices. Our findings suggest that short-duration, rental contracts may help reduce discriminatory outcomes. The shorter duration and the lower perceived risk of renting may encourage white residents to move into more-diverse neighborhoods. And renting in a more-diverse neighborhood may help dispel discriminatory misperceptions that are based on mistaken stereotypes or even eradicate discriminatory preferences, such that when the time comes to buy a house (long-duration contract), the search will include more-diverse neighborhoods. If short-duration, rental contracts can be more conducive to racial integration, this provides a reason to soften the strong policy preference for homeownership. We also briefly explore the relationship between contract duration and other contractual design choices beyond the housing context.

Machine learning algorithms are increasingly able to predict what goods and services particular people will buy, and at what price. It is possible to imagine a situation in which relatively uniform, or coarsely set, prices and product characteristics are replaced by far more in the way of individualization. Companies might, for example, offer people shirts and shoes that are particularly suited to their situations, that fit with their particular tastes, and that have prices that fit their personal valuations. In many cases, the use of algorithms promises to increase efficiency and to promote social welfare; it might also promote fair distribution. But when consumers suffer from an absence of information or from behavioral biases, algorithms can cause serious harm. Companies might, for example, exploit such biases in order to lead people to purchase products that have little or no value for them or to pay too much for products that do have value for them. Algorithmic harm, understood as the exploitation of an absence of information or of behavioral biases, can disproportionately affect members of identifiable groups, including women and people of color. Since algorithms exacerbate the harm caused to imperfectly informed and imperfectly rational consumers, their increasing use provides fresh support for existing efforts to reduce information and rationality deficits, especially through optimally designed disclosure mandates. In addition, there is a more particular need for algorithm-centered policy responses. Specifically, algorithmic transparency—transparency about the nature, uses, and consequences of algorithms—is both crucial and challenging; novel methods designed to open the algorithmic “black box” and “interpret” the algorithm’s decision-making process should play a key role. In appropriate cases, regulators should also police the design and implementation of algorithms, with a particular emphasis on the exploitation of an absence of information or of behavioral biases.

This paper lays a foundation for a new theory of manipulation based on the misprioritization of (truthful) information. Since consumers review only a subset of all available information, firms can harm consumers by prioritizing information that maximizes firms’ profits but has a smaller impact on the utility that consumers stand to gain from the purchase. Moreover, the distortions due to misprioritized information can arise not only from firms’ boastful disclosures but also from the warnings and disclosures mandated by lawmakers. This paper identifies the product and market characteristics that determine the optimal prioritization of information and, correspondingly, the incidence of harm when the wrong information is prioritized for disclosure—either voluntarily by sellers or by legal mandate. It provides a framework for optimal legal intervention.

Disclosure-based nudges are increasingly utilized by governments around the world to achieve policy goals related to health, safety, employment, environmental protection, retirement savings, credit, debt, and more. Yet, a critical aspect of these nudge-type policy interventions—the mode of communication—remains unexplored. We study the effects of the communication medium on debt collection procedures, using a policy experiment conducted in cooperation with the Israeli Ministry of Justice. Debtors often lack adequate information about the debt, the judgment, and the enforcement and collection procedures. As a result, the process of debt collection is often harmful to the debtor and ineffective in securing repayment. We manipulate the choice of medium--telephone, regular mail, text message, and video message--holding fixed the content of the communication. We find that digital communication strategies, in particular, communicating via text message, were the most cost-effective, significantly improving the outcomes for both debtors and creditors.

This paper lays a foundation for a new theory of manipulation, based on the misprioritization of (truthful) information. Since consumers review only a subset of all available information, firms can harm consumers by prioritizing information that maximizes firms’ profits but has a smaller impact on the utility that consumers stand to gain from the purchase. Moreover, the distortions due to misprioritized information can arise not only from firms’ boastful disclosures, but also from the warnings and disclosures mandated by lawmakers. The paper identifies the product and market characteristics that determine the optimal prioritization of information and, correspondingly, the incidence of harm when the wrong information is prioritized for disclosure—either voluntarily by sellers or by legal mandate. It provides a framework for optimal legal intervention.

Policymakers and scholars — both lawyers and economists — have long been pondering the optimal design of default rules. From the classic works on “mimicking” defaults for contracts and corporations to the modern rush to set “sticky” default rules to promote policies as diverse as organ donations, retirement savings, consumer protection, and data privacy, the optimal design of default rules has featured as a central regulatory challenge. The key element driving the design is opt-out costs — how to minimize them, or alternatively how to raise them to make the default sticky. Much of the literature has focused on “mechanical” opt-out costs — the effort people incur to select a non-default alternative. This focus is too narrow. A more important factor affecting opt-out is information — the knowledge people must acquire to make informed opt-out decisions. But, unlike high mechanical costs, high information costs need not make defaults stickier; they may instead make the defaults “slippery.” This counterintuitive claim is due to the phenomenon of uninformed opt-out, which we identify and characterize. Indeed, the importance of uninformed opt-out requires a reassessment of the conventional wisdom about Nudge and asymmetric or libertarian paternalism. We also show that different defaults provide different incentives to acquire the information necessary for informed opt-out. With the ballooning use of default rules as a policy tool, our information-costs theory provides valuable guidance to policymakers.

The move to smart disclosure promises to revitalize disclosure mandates and save them from a fate of ignored verbiage. But by making disclosure relevant and effective, this shift to smart disclosure also raises several concerns. Specifically, simple disclosures like genetically modified food disclosures, restaurant hygiene grades, annual percentage rate disclosures, etc., can result in market distortions and inefficiencies as: (1) consumers might draw false inferences from the disclosure; and (2) disclosing one dimension will elevate this dimension relative to other dimensions, and thus distort demand for the product and even alter the product itself. Relatedly, System 1 disclosures, like graphic cigarette labels, might influence behavior by triggering an emotional response rather than through informed deliberation, thus abandoning traditional justifications for disclosure mandates. In light of these concerns, it is more difficult to view disclosure mandates as minimally paternalistic. Government, by tweaking disclosure design, wields substantial power over markets and consumers.

Power and productivity mediate economic outcomes across markets–both product markets and labor markets. We develop a neoclassical economic framework that combines productivity and power, and presents the balance between them as an equilibrium outcome determined by strategic investments–by firms, consumers and workers–in law, technology, (mis)perceptions and ideology. An actor’s choice of investment–most important, the choice between a productivity-increasing investment and a power-increasing investment–can be explained by the relative marginal return from the different investments. Whereas the incentives of firms and consumers and those of firms and workers are roughly aligned with respect to productivity-increasing investments, they are diametrically opposed with respect to power-increasing investments. Since investments affect surplus and thus the resources available for future investment, the model features multiple equilibria and path dependence. Policy intervention may be needed to shift the market from a bad equilibrium, with low productivity and adverse distributive consequences, to a more efficient and more equitable equilibrium. Policy intervention may also be needed to control welfare-reducing, power-seeking investments. While some degree of market power may be needed to support long-term efficiency, innovation and economic growth, firms will often seek excessive market power that will reduce overall welfare. Policymakers should strive to optimize power structures across different markets, e.g., by influencing the relative return from different power-increasing and productivity-increasing investments. The explanatory power of our theoretical framework is demonstrated through a series of detailed case studies–from the home broadband and net neutrality wars and the antitrust battles of Microsoft and now Google to the struggles between firms and unions during 19th century industrialization and the evolving story of Uber and the gig economy. Our framework informs ongoing debates in antitrust law, labor and employment law, intellectual property law, and consumer protection law, and in any other area of law that regulates, directly or indirectly, product or labor markets.

From a welfarist perspective, willingness to pay (WTP) is relevant only as a proxy for individual preferences or utilities. Much of the criticism levied against the WTP criterion can be understood as saying that WTP is a bad proxy for utility, or that WTP contains limited information about preferences. Specifically, critics of WTP claim wealth effects prevent it from serving as a good proxy for utility. I formalize and extend this critique by developing a methodology for quantifying the informational content of WTP. The informational content of WTP depends on how WTP is measured and applied. First, I distinguish between two types of policies: (i) policies that are not paid for by the individuals they affect and (ii) policies that are paid for by the individuals they affect. Second, I distinguish between two types of WTP measures: (i) individualized WTP and (ii) uniform, average WTP (like the value of a statistical life). When the cost of the policy is not borne by the affected individuals, individualized WTP has low informational content and increases wealth disparity. Uniform, average WTP has higher informational content and reduces wealth disparity, at least in the case of universal benefits. Therefore, when possible, a uniform, average WTP should be preferred in this scenario. When the cost of the policy is borne by the affected individuals, individualized WTP has high informational content but increases wealth disparity. Uniform, average WTP has lower informational content and indeterminate distributional implications. Here, the choice between individualized WTP and uniform, average WTP is more difficult. I briefly consider two extensions. The first involves time. I present a dynamic extension of the relationship between the informational content of WTP and the wealth distribution. The second extension emphasizes the effect of forward-looking rationality on the WTP measure. The question of rationality raises additional concerns about WTP-based policymaking.

There is concern that present-biased agents incur too much debt because of its deferred costs – concern that has influenced regulation of consumer credit. While this concern is valid when debt is used to finance current consumption, credit may increase efficiency when it is used to fund durable good purchases, which is the most common use of debt. Without debt, present-biased agents underconsume durable goods because of their deferred benefits. The deferred cost of debt can offset the deferred benefit from the durable good. We study the effects of purchase-financing on the demand for durable goods by present-biased agents.

Behavioral Law and Economics was born approximately 20 years ago, when Behavioral Economics started to be systematically utilized in the service of legal policymaking.1 Before then, people’s responses to legal rules were studied using the rationality assumption of Neoclassical Economics. Behavioral Economics, which replaces the rationality assumption with a more realistic, empirically based understanding of human decision-making, has been around for much longer.2 But it always takes law a few decades to catch up. Behavioral Ethics (BE), focusing “on people’s inability to recognize the extent to which self-interest in its broader sense affects their behavior,”3 has also been around for a while. And, as with Behavioral Economics, it has taken too long for Behavioral Ethics to make inroads into legal policymaking. In his important book, The Law of Good People, Professor Feldman lays the foundation for finally bringing Behavioral Ethics into law with full force. This is a major contribution. This short Comment consists of two Parts. The first, larger part seeks to situate The Law of Good People and BE more generally, vis-à-vis the more established Behavioral Law and Economics (BLE). The main claim is that BE is a close cousin to BLE and that drawing on these familiar similarities is often more useful than highlighting differences (as The Law of Good People tends to do). The second part of the comment focuses on a particular, substantive question, concerning the relationship between deterrence and unawareness or non-deliberative reactions. It challenges the BE claim that unawareness undermines the goal of deterring bad behavior. Before I begin, I wish to emphasize an important caveat: The book draws on a rich literature in psychology and BE, which I am not steeped in. I have not attempted to master this literature, although I am aware that this failure will hurt the quality, even credibility, of this Comment. My goal is a modest one—to take The Law of Good People as a stand-alone statement (without the nuances and qualifications that a rich literature can offer, but a single book cannot), and offer the unlearned reaction of an outsider.

The rise of big data and sophisticated, machine learning algorithms is increasing the prevalence of price discrimination and even personalized pricing. In traditional models, where consumers’ willingness-to-pay (WTP) is a function of preferences (and budget constraints), price discrimination is often celebrated for increasing efficiency albeit while reducing consumer surplus. This favourable view of price discrimination should be re-evaluated when WTP is a function of both preferences and misperceptions. With demand-inflating misperceptions, price discrimination is even more harmful to consumers and might reduce efficiency. These results are derived using a simple, linear demand model with different levels of price discrimination (or segmentation). In the many consumer markets where misperception is common, more careful scrutiny of price discrimination is warranted.

Law is for humans. Humans suffer from cognitive limitations. Legal institutions can help humans by making these limitations irrelevant. This experiment shows that strong property rights serve this function. In theory, efficient outcomes obtain even without strong property rights. In a hypothetical world where cognitive ability is perfect, individuals would not engage in wasteful taking wars. A party would not take another’s good, if she expects that the good will ultimately be taken back. By contrast, the large majority of experimental subjects takes a token good when interacting with a computer they know to maximize profit, and that has a symmetric ability to take the good back. Experience mitigates the inefficiency, but does not eliminate it; and in the real world relevant experience is often lacking. We show that cognitive limitations prevent weak property rights – imperfectly enforced property rules and liability rules with low damages – from securing efficient outcomes. Strong property rights should be preferred, because they are dummy proof.

This paper studies the implications of consumer misperception in a market for a (horizontally) differentiated product. Two distinct type of misperceptions are considered: (i) a common misperception that leads consumers to similarly overestimate the benefit from both firms’ products; and (ii) a relative misperception that leads consumers to overestimate the relative benefit of one firm’s product as compared to the product offered by its competitor. The paper analyzes the implications of misperception for social welfare and consumer surplus. In particular, the effects of price discrimination are considered, for each type of misperception.

How does the prospect of sale affect the seller’s incentive to investigate — to acquire socially valuable information about the asset? How do the disclosure rules of contract law influence the investigation decision? Shavell (1994) showed that, if sellers and buyers are symmetrically informed, at the pre-investigation stage, then a mandatory disclosure rule leads to a first-best outcome, and a voluntary disclosure rule leads to a suboptimal outcome. But in many real-world cases owners of assets have better information about their assets, even before they investigate. In such asymmetric information settings, we show, mandatory disclosure no longer attains a first-best outcome. And, under certain conditions, voluntary disclosure is the more efficient rule. We further enrich the analysis by introducing a third rule: the mandatory post-disclosure rule, which requires disclosure of material information, but only after the contract is concluded. We show that this rule can be more efficient than both voluntary disclosure and mandatory (pre-contract) disclosure.

Disclosure mandates are pervasive. Though designed to inform consumers, such mandates may lead consumers to draw false inferences – for example, that a product is harmful when it is not. When deciding to require disclosure of an ingredient in or characteristic of a product, regulators may be motivated by evidence that the ingredient or characteristic is harmful to consumers. But they may also be motivated by a belief that consumers have a right to know what they are buying or by interest-group pressure. Consumers who misperceive the regulator’s true motive, or mix of motives, will draw false inferences from the mandated disclosure. If consumers think that the disclosure is motivated by evidence of harm, when in fact it is motivated by a belief in a right-to-know or by interest-group pressure, then they will be inefficiently deterred from purchasing the product. We analyze this general concern about disclosure mandates. We also offer survey evidence demonstrating that the risk of false inferences is serious and real. Our framework has implications for the ongoing debate over the labeling of food with genetically modified organisms (GMOs); it suggests that the relevant labels might prove misleading to some or many consumers, producing a potentially serious welfare loss. Under prevailing executive orders, regulators must consider that loss and if feasible, quantify it.

Sellers are increasingly utilizing big data and sophisticated algorithms to price discriminate among customers. Indeed, we are approaching a world, where each consumer will be charged a personalized price for a personalized product or service. Is this type of price discrimination good or bad? The normative assessment, I argue, depends on the target of discrimination. Sellers are interested in the consumer's willingness-to-pay (WTP) for their goods or services: They maximize profits by charging a price that is as close as possible to the consumer’s WTP. This WTP is a function of consumer preferences on the one hand and consumer (mis)perceptions on the other hand. When algorithmic price discrimination targets preferences, it harms consumers but increases efficiency. When price discrimination targets misperceptions, specifically demand-inflating misperceptions, it hurts consumers even more and might also reduce efficiency. In such cases, legal intervention may be needed. In particular, when sellers use personalized pricing, regulators should fight fire with fire and seriously explore the potential of personalized law.

Strong, property rule protection – implemented via injunctions, criminal sanctions and supercomepnsatory damages – is a defining aspect of property. What is the theoretical justification for property rule protection? The conventional answer has to do with the alleged shortcomings of the weaker, liability rule alternative: It is widely held that liability rule protection – implemented via compensatory damages – would interfere with efficient exchange and jeopardize the market system. We show that these concerns are overstated and that exchange efficiency generally obtains in a liability rule regime. But only when the parties are perfectly rational. When the standard rationality assumption is replaced with a more realistic, bounded rationality assumption, liability rules no longer support exchange efficiency. Bounded rationality thus emerges as a foundational element in the theory of property.

Effective defenses that are designed to protect civilians in war have significant implications for policy planning, military strategy, international relations, domestic politics and economics. Defenses can increase or decrease overall humanitarian welfare. Surprisingly, existing legal scholarship has focused almost exclusively on offensive action, failing to consider the effects of defenses on the strategic interactions between armed rivals or the humanitarian consequences of defenses. The implications of defenses for the interpretation and application of the international legal rules on the use of force have also gone largely unexplored. We set out to fill this significant gap. We study the operation of defensive systems in both asymmetric rivalries and symmetric rivalries, and consider the interplay between defenses and offensive measures. We analyze how defensive systems are likely to affect parties’ wartime conduct and the potential consequences for the welfare of civilians on both sides of the conflict. A central motivating observation is that defenses have the potential of safeguarding not only the lives of the defending party’s civilians but also those on the opposing side. Our analysis further considers how international law, and especially the principle of proportionality, might affect parties’ choices with regard to investments in defenses. Counter-intuitively, we caution that under some circumstances, an overly-restrictive application of the principle of proportionality might deter investment in defenses, thereby decreasing overall humanitarian welfare. To make our theoretical models more concrete, we draw on several real-world examples: the Israeli anti-ballistic missile system, Iron Dome; the deployment of anti-missile defenses by Japan and the United States to meet the threat from North Korea; and the race between the two Cold War protagonists to develop superior inter-continental anti-ballistic missiles systems, which eventually lead to the 1972 ABM Treaty.

The theoretical availability of an infinite number of contract types suggests that there may be an optimal quantity from which contractual parties could make a selection. In this Article, we emphasize the difficulty of identifying that optimal number, given information costs and other transaction costs related to the production of a contract type. We argue that standard market failures might cause markets to produce a suboptimal number of contract types. We then consider whether government should intervene to remedy any market failure. We conclude that government would generally lack the access to information necessary to identify the optimal number of contract types. Moreover, we argue that issues of political economy would impede the ability of government to achieve the optimal number of contract types, even if it were able to identify that number. Government, that is, may tend to either oversupply or undersupply contract types. Perhaps the best that government can do is to provide “soft” interventions that reflect appropriate defaults or safe harbors.

We study the effects of legal protection on the likelihood of efficient trade. Fairness norms that affect the parties’ willingness to pay (WTP) and willingness to accept (WTA) may depend on how strongly the entitlement is protected. We show that our participants can be divided into three groups corresponding to three fairness norms: negative types, whose WTP and WTA are decreasing in the strength of the legal remedy; positive types, whose WTP and WTA are increasing in the strength of the legal remedy; and flat types, whose WTP and WTA do not depend on the strength of the legal remedy. We find that type is role dependent such that a higher WTP and a lower WTA—the combination most conducive to efficient trade—is obtained with a weaker legal remedy.

In a full-information, zero transactions costs world, the degree of protection afforded to an entitlement does not affect the likelihood of efficient trade. In reality, imperfect information is often inevitable. Specifically, a party will usually have incomplete information about fairness norms held by the other party – fairness norms that affect the other party’s willingness to pay (WTP) or willingness to accept (WTA). Importantly, these fairness norms may depend on how strongly the entitlement is protected. We experimentally test the effect of the degree of protection on the parties’ WTP and WTA and on the likelihood of efficient trade by varying the legal remedy for infringing upon the owner’s entitlement. We show that our participants can be divided into three groups corresponding to three different fairness norms: negative types whose WTP and WTA are decreasing in the strength of the legal remedy; positive types whose WTP and WTA are increasing in the strength of the legal remedy; and flat types whose WTP and WTA do not depend on the strength of the legal remedy. We find that type is role-dependent, such that a higher WTP and a lower WTA – the combination most conducive to efficient trade – is obtained with a weaker legal remedy.

There are good reasons to believe that consumers’ behavior is sometimes influenced by systematic misperceptions of legal norms that govern product quality. Consumers might misperceive specific rules, such as those found in food safety regulations, as well as more general standards, such as the unconscionability doctrine or limitations on waivers of default substantive or procedural rights. When demand is affected by systematic misperceptions of legal norms, lawmakers may be able to maximize welfare by deviating from the legal standard that would be optimal in the absence of misperception. We use a formal model to characterize these optimal deviations under different legal regimes (with different types and magnitudes of sanctions). In particular, should the legal standard be adjusted to correct or confirm the misperception? For instance, if consumers under-estimate the level of legal protection is it desirable to raise the legal standard to correct the misperception? Or should lawmakers lower the legal standard to confirm the misperception?

In 2012, the American Law Institute asked us to serve as reporters for a new Restatement of Consumer Contracts. Recognizing that many innovations in American contract law in the past generation occurred in the area of consumer transactions, the project seemed timely and challenging. We discovered that many of these innovations are controversial and seemingly subject to conflicting approaches in the case law and heated debates among commentators. We also discovered that prior attempts to devise a unified set of rules have largely failed. We therefore decided to take a new approach to our search for, and restatement of, the emerging rules. In addition to identifying the majority rules, we used an empirical approach that involved collecting, coding, and systematically analyzing the entire body of court decisions on relevant questions. We identified the degree of support that different rules garnered in courts and the rate at which they were adopted or rejected over time. We thus discovered which rulings and rationales serve as guiding pre­cedent. We based the black-letter rules in the final draft of the Restatement of Consumer Contracts on these findings (complementing them with qualitative support). In this Essay, we present our empirical approach to searching for the law and legal precedent, discuss its conceptual and normative foundations, and describe some of the doctrinal debates it helped resolve.

The design of default provisions in consumer contracts involves an aspect that does not normally arise in other contexts. Unlike commercial parties, consumers have only limited information about the content of the default rule and how it fits with their preference. Inefficient default rules may not lead to opt outs when they deal with technical aspects consumers rarely experience and over which consumers’ preferences are defined only crudely. This paper develops a model in which consumers are uninformed about their preferences, but can acquire costly information and then choose a contract term that best matches their preferences. The paper explores the optimal design of default rules in such environments, and how it differs from the existing conceptions of efficient default rule design.

The Coase theorem posits: If [1] property rights are perfect, [2] contracts are enforceable, [3] preferences are common knowledge, and [4] transaction costs are zero, then the initial allocation of property rights only matters for distribution, not for efficiency. In this paper we claim that condition [1] can be dropped and show experimentally that this is also empirically true. This also holds when we frame taking as “stealing”, and when the initial possessor has to work for the good.

In an important new book, Phishing for Phools, George A. Akerlof and Robert J. Shiller demonstrate, through a series of examples, the prevalence of manipulation (“phishing”) in consumer markets and in society more broadly. Manipulation is inevitable, they argue. It is the equilibrium outcome. High-road sellers will soon lose out to their low-road competitors and disappear from the market. You must manipulate to survive: phish or perish. As Akerlof and Shiller recognize, their book builds on a now rich literature in behavioral economics. Their contribution lies in the generality of their claims and in their ambition to present market failure – the bad phishing equilibrium – as the rule, rather than the exception. This short post does two things: First, it discusses consumer contracts as an example of phishing. Second, it considers different policy responses to the unhappy picture that Akerlof and Shiller so vividly paint.

Ben-Shahar and Schneider have written an important book: "More Than You Wanted to Know." They develop a powerful critique of a prevalent regulatory technique: Mandatory Disclosure. They argue that disclosure does not work and that it cannot be fixed. Lawmakers should, therefore, abandon this ineffective and, possibly, harmful regulatory approach and look elsewhere or … do nothing. While I agree with almost everything they write, when the authors discuss, and critique, “scores” toward the end of Chapter 8, I must respectfully disagree. This article focuses on scores, presenting their benefits and costs and, as examples, focusing specifically on three types. I also seek common ground between my position and that of the authors, and conclude by venturing beyond scores to discuss the promise of full disclosure targeted at intermediaries, rather than consumers.

Many consumer markets feature a multidimensional price. A policy maker—a legislator, a regulator, or a court—concerned about the level of one price dimension may decide to cap this price. How will such a price cap affect other price dimensions? Will the overall effect be good or bad for consumers? For social welfare? Price caps can be beneficial when sellers set prices in response to consumers’ misperception. The scope for welfare-enhancing regulation depends on the type (and direction) of the underlying misperception and on market structure.

The goal of this post is to highlight one particular problem raised by the Big Data revolution – the problem of price discrimination. Price discrimination describes a situation where a seller, usually a monopolist (or, more generally, a seller with some degree of market power), charges different prices to different consumers for the very same product or service. The seller seeks to identify her customer’s willingness to pay, and then charges higher prices to those consumers who are willing to pay more.

Happiness and the Law is an important book. Bronsteen, Buccafusco and Masur (BBM) provide a well-written, thought-provoking, rigorous introduction to hedonic psychology and its many potential applications in law and policy. Numerous lessons are already ripe for consumption by policymakers. Other ideas set the stage for a fruitful research agenda that will influence policy in years to come.

In diverse areas—from retirement savings, to fuel economy, to prescription drugs, to consumer credit, to food and beverage consumption—government makes personal decisions for us or helps us make what it sees as better decisions. In other words, government serves as our agent. Understood in light of Principal-Agent Theory and Behavioral Principal-Agent Theory, a great deal of modern regulation can be helpfully evaluated as a hypothetical delegation. Shifting from personal decisions to public goods problems, we introduce the idea of reverse delegation, with the government as principal and the individuals as agents.

Consumer transactions differ from the archetypal arm’s-length contract on which both classical contract law and neoclassical economics focus. These transactions are marked by an imbalance between sellers and buyers. The underlying concern is that imperfectly informed and imperfectly rational consumers might fail to fully comprehend the costs and benefits of the product or service that they are purchasing. Moreover, sophisticated sellers can be expected to design their products, prices, and contracts in response to consumer misperception. Indeed, the design of consumer transactions can best be viewed as the outcome of an interaction between market forces and the psychology of consumers. The resulting behavioral market failure hurts consumers and reduces efficiency. Legal responses range from hard paternalistic policies to soft paternalistic policies, focusing on disclosure, default rules and safe harbors, and the right to withdraw from the transaction.

I feel privileged that scholars of the caliber of Epstein, Becher and Zarsky and Teichman have engaged so deeply with my book, Seduction by Contract: Law, Economics and Psychology in Consumer Markets (hereinafter “Seduction”).1 I agree with many of their comments and observations. In this brief Response, I will attempt to clarify some of the arguments made in Seduction and explain why these arguments are consistent with many of the comments made by my four esteemed colleagues. Still, several important points of contention remain, and those too will be addressed in this Response.

Exit from contract is one of the most powerful consumer protection devices, freeing consumers from bad deals and keeping businesses honest. Yet consumers often choose transactions with lock-in provisions, trading off exit rights for other perks. This article examines the costs and benefits of free exit, as compared to the lock-in alternative. It argues that present regulation of exit penalties is poorly tailored to address concerns about lock-in, particularly in light of increasingly ubiquitous market-based solutions. The article also calls (regulatory) attention to loyalty rewards, which are shown to be as powerful as exit penalties, and equally detrimental.

We analyze a distinct category of cases—Harm–Benefit cases—in which harm to the victim is accompanied by benefit to the injurer. While liability should be imposed when the benefit exceeds the harm, the case for liability becomes weaker when the harm is larger than the benefit. Therefore, it is often more important to impose liability on the non-negligent injurer than on the negligent injurer. We study the incentive effects of different liability rules, as well as the restitution rule. Our analysis also sheds new light on the law of takings. And it applies in certain contractual settings.

This Article classifies the consumer protection techniques that European contract law employs into four categories: Mandatory arrangements; disclosure; regulation of entry to and exit from contract; and pro-buyer default rules and contract interpretation. It argues that these techniques are far less likely to succeed than advocates, including the European Commission, believe, and they may bring about unintended consequences and hurt consumers. The techniques and their limits are illustrated through a study of proposed Common European Sales Law (CESL). The Article argues that the ambitious pursuit of consumer protection goals is also likely to interfere with the other main goal of the European contract law: harmonizing the laws of member states, encouraging cross border trade, and improving consumer' access to markets.

הגישה המסורתית של דיני הגנת הצרכן מניחה כי הצרכן מצוי בנחיתות מתמדת במערכת היחסים עוסק–צרכן. על פי גישה זו, לעוסקים יש ניסיון, משאבים, ייעוץ מקצועי, יכולת להשפיע על מעצבי המדיניות, אינטרס כלכלי להתארגן וכוח כלכלי רב. צרכנים אינם נהנים מכל אלו. הם חשופים למניפולציות מצד תאגידים שכל מטרתם הוא מקסום שורת הרווח במאזניהם. לפיכך דיני הגנת הצרכן מושתתים על ההבנה כי פערי הכוחות הטיפוסיים שבין הצרכן לבין העוסק מחייבים התערבות משפטית רגולטורית שתגן על הצרכן מפני כוחו העודף של העוסק. לניתוח הכלכלי של המשפט נקודת מוצא שונה בתכלית. הניתוח הכלכלי מראה שכוחות השוק יכולים להגן על הצרכנים אף בהיעדר התערבות משפטית. לפיכך הניתוח הכלכלי של המשפט דוחה את ההנחה המסורתית של דיני הגנת הצרכן שלפיה על המשפט להיחלץ, באופן כמעט אוטומטי, להגנתם של הצרכנים. ואולם, הניתוח הכלכלי אינו שולל את הצורך בהתערבות משפטית. ההתערבות המשפטית יכולה להיות מוצדקת, על פי הניתוח הכלכלי, כאשר קיים כשל שוק. כלומר, כאשר כוחות השוק אינם פועלים כנדרש כדי למקסם את העדפות הצרכנים. פרק זה מתמקד בשני כשלי שוק החשובים במיוחד לניתוח הכלכלי של שווקים צרכניים: "מידע חסר" ו"רציונליות חסומה". באופן קונקרטי, בחרנו ליישם את כשלי השוק האמורים על חוזים צרכניים, המהווים צוהר אל דיני הצרכנות. באמצעות דיון זה נמחיש שתכופות אין די בכוחות השוק כדי להביא לשיווי משקל שבו ספקים מציעים חוזים יעילים הממקסמים את רווחת הצרכנים. כן נדגים כיצד הדיון בחוזים אחידים והתובנות הנגזרות מדיון זה רלוונטיים לדיני הצרכנות באופן כללי יותר. במסגרת זו נבחן את התגובות המשפטיות האפשריות העומדות בפני המחוקק, תוך דיון ביתרונות ובחסרונות המרכזיים הטמונים בדרכי תגובה אלו.

The cell phone service market is an economically significant market that has substantially increased consumer welfare. In this article, we focus on the pricing of cell phone service. The common pricing structure is a three-part tariff comprising: (1) a monthly charge; (2) a fixed number of minutes that the monthly charge pays for; and (3) a per-minute price for minutes beyond the plan limit. Using a unique data set of consumer-level monthly billing and usage information for 3,730 consumers at a single wireless provider, we evaluate the explanatory power of three accounts of the three-part tariff: a rational choice account; a behavioral account proposed by Grubb (2009) that supposes that consumers are overconfident in their estimates of their future usage; and a second behavioral account that posits that some consumers overestimate their average future usage while others underestimate it. We quantify the mistakes that consumers make in plan choice and, extrapolating from our data, estimate that these mistakes cost U.S. consumers over $13 billion annually. Our analysis suggests that regulation mandating the disclosure of product use information can be socially desirable in the cell phone service market.

Courts and commentators are increasingly concerned about police misconduct — searches and seizures that fail to comply with Fourth Amendment protections. Current doctrine attempts to deter such misconduct with the threat of excluding unlawfully seized evidence. The remedy of exclusion is weak, however, in large part because judges only see cases in which the defendant obviously is guilty. Despite years of proposals, the alternative of money damages is largely unavailable. The problem is exacerbated because Fourth Amendment law is notoriously uncertain. The combination of these three factors results in ineffective deterrence of Fourth Amendment violations. We propose to replace the failed deterrence model with a stringent ex ante warrant requirement. We make a novel case for warrants based on findings from the social sciences. The Court, rather than continuously weakening the warrant requirement, should reverse course and set warrants as the centerpiece of the Fourth Amendment.

We take a fresh look at the concerns about credit card pricing and empirically investigate whether the Credit CARD Act of 2009 (the CARD Act) has been successful in addressing those concerns. The rational choice theory of credit card pricing, which posits that issuers use back-end fees to adjust the price of credit to reflect new information about borrowers’ credit risk, predicts that issuers will respond to the CARD Act by using alternative ways to price risk. In contrast, the behavioral economics theory, which posits that issuers use back-end fees because they are not salient to consumers, predicts that issuers will respond by increasing unregulated nonsalient prices. If the market is competitive, we argue that the CARD Act should also result in increases in some salient, up-front prices. But we show that if issuers have market power, reductions in nonsalient fees may not result in concomitant increases in salient charges. We test these predictions using two datasets on credit card contract terms before and after the CARD Act rules went into effect. We find that the rules have substantially reduced the back-end fees directly regulated by the CARD Act, including late fees and over-the-limit fees. However, unregulated contract terms, such as annual fees and purchase interest rates, have changed little. Post–CARD Act, consumers continue to face high long-term prices and low short-term prices, and imperfectly rational consumers still have difficulty understanding the cost of credit card borrowing. We thus consider potential improvements to the regulatory framework. We argue that improved disclosures that provide consumers with the aggregate cost of credit under the contract, based on information about the borrower’s likely use of credit, would improve consumer outcomes. Furthermore, we suggest that regulators should not focus only on prices that are “too high” but should also consider limiting the ability of issuers to charge introductory teaser interest rates that are, in a sense, “too low.”