Faculty Bibliography
-
Favorite
Type:
Categories:
Sub-Categories:
Links:
Concern about asymmetric information in markets for consumer goods and services has focused on product-attribute information. We highlight the importance of another category of information--product-use information. In important markets, sellers have better information about how a consumer will use their product or service than the consumer herself. Moreover, we show that the classic unraveling results do not extend to product-use information, and thus sellers are less likely to voluntarily disclose this type of information. Our findings have important policy implications: While most disclosure mandates target product-attribute information, our analysis suggests that mandating disclosure of product-use information may be more important. Indeed, policy makers are beginning to recognize the importance of product-use disclosures.
-
Favorite
Type:
Categories:
Sub-Categories:
Consumers routinely enter into long-term contracts with providers of goods and services - from credit cards, mortgages, cell phones, insurance, TV, and internet services to household appliances, theatre and sports events, health clubs, magazine subscriptions, transportation, and more. Across these consumer markets certain design features of contracts are recurrent, and puzzling. Why do sellers design contracts to provide short-term benefits and impose long-term costs? Why are low introductory prices so common? Why are the contracts themselves so complex, with numerous fees and interest rates, tariffs and penalties? Seduction by Contract explains how consumer contracts emerge from the interaction between market forces and consumer psychology. Consumers are short-sighted and optimistic, so sellers compete to offer short-term benefits, while imposing long-term costs. Consumers are imperfectly rational, so sellers hide the true costs of products and services in complex contracts. Consumers are seduced by contracts that increase perceived benefits, without actually providing more benefits, and decrease perceived costs, without actually reducing the costs that consumers ultimately bear. Competition does not help this behavioural market failure. It may even exacerbate it. Sellers, operating in a competitive market, have no choice but to align contract design with the psychology of consumers. A high-road seller who offers what she knows to be the best contract will lose business to the low-road seller who offers what the consumer mistakenly believes to be the best contract. Put bluntly, competition forces sellers to exploit the biases and misperceptions of their customers. Seduction by Contract argues that better legal policy can help consumers and enhance market efficiency. Disclosure mandates provide a promising avenue for regulatory intervention. Simple, aggregate disclosures can help consumers make better choices. Comprehensive disclosures can facilitate the work of intermediaries, enabling them to better advise consumers. Effective disclosure would expose the seductive nature of consumer contracts and, as a result, reduce sellers' incentives to write inefficient contracts. Developing its explanation through a general framework and detailed case studies of three major consumer markets (credit cards, mortgages, and cell phones), Seduction by Contract is an accessible introduction to the law and economics of consumer contracts, and a powerful critique of current regulatory policy.
-
Type:
Categories:
Sub-Categories:
-
Type:
Categories:
Sub-Categories:
-
Type:
Categories:
Sub-Categories:
Links:
In some cases, the law permits a party that unilaterally provides a benefit to another party to recover the estimated value of this benefit. Despite calls for expanding the set of cases to which such a restitution rule applies, the law commonly applies a mutual consent rule under which a party providing another with a benefit cannot obtain any recovery without securing the advance consent of the beneficiary to the transaction. We provide an efficiency rationale for the undesirability of broad use of the restitution rule by identifying significant adverse ex ante effects of the rule that are avoided by the consent requirement. Even assuming that courts' errors in estimating buyer benefits would be unbiased, a restitution rule would strengthen sellers' hand by providing them with a put option that they may but do not have to use. As a result, the restitution rule would encourage inefficient market entry by low-quality sellers that would not contribute to any efficient transactions but would be able to extract payments from buyers seeking to avoid an exchange with them. Furthermore, the restitution rule would discourage efficient market entry by some or all potential buyers of a good or service. Beyond the restitution rule, we extend our analysis to show that similar adverse effects can also arise from other "pricing" rules that provide buyers or sellers with call or put options to force an exchange at a judicially-determined price.
-
Type:
Categories:
Sub-Categories:
Consumer contracts are pervasive. Yet, the promises that make up these contracts are becoming increasingly empty, as sellers reserve the power to modify their contracts unilaterally. While some modifications benefit both sellers and consumers, others increase seller profits at the consumer’s expense. The law’s goal should be to facilitate good modifications, while preventing bad ones. Currently this goal is not met. The problem is twofold. First, consumers fail to appreciate the risk of unilateral modification and thus fail to demand a commitment by sellers to avoid inefficient modifications. Second, and more important, even if consumers demand a commitment to make only mutually beneficial modifications, existing commitment mechanisms—consumer assent to modifications, judicial review of modifications, and seller reputation—are inadequate. We propose a novel commitment mechanism: adding Change Approval Boards (“CABs”) as parties to consumer contracts. These CABs would selectively assent to, or withhold assent from, contractual changes that sellers wish to make, according to each CAB’s modification policy. We envision a market for CABs—multiple CABs, each striking a different balance between flexibility and security, offering a range of modification policies from which consumers can choose. The market-based CAB system promises to deter abusive term changes while retaining the flexibility to change consumer contracts when change is justified.
-
Oren Bar-Gill & Omri Ben-Shahar, The Prisoners’ (Plea Bargain) Dilemma, 33 Reg., Winter 2010, at 42.
Type:
Categories:
Sub-Categories:
This article is based on the authors’ paper, “The Prisoners’ (Plea Bargain) Dilemma, Journal of Legal Analysis (2009).
-
Type:
Categories:
Sub-Categories:
The CFPA has been the target of much criticism — criticism that aims to derail the CFPA proposal. Congress must see through this criticism. While the critics are making some valid points, their most powerful arguments have nothing to do with the basic question: Do we need a CFPA? The (almost) uncontested answer to this question is: “Yes, we do.”
-
Oren Bar-Gill, The Consumer Financial Protection Agency: Sorting the Critiques, Lombard Street, Sept. 14, 2009, at 4.
Type:
Categories:
Sub-Categories:
-
Type:
Categories:
Sub-Categories:
Links:
How can a prosecutor, who has only limited resources, credibly threaten so many defendants with costly and risky trials and extract plea bargains involving harsh sentences? Had defendants refused to settle, many of them would not have been charged or would have escaped with lenient sanctions. But such collective stonewalling requires coordination among defendants, which is difficult if not impossible to attain. Moreover, the prosecutor, by strategically timing and targeting her plea offers, can create conflicts of interest among defendants, frustrating any attempt at coordination. The substantial bargaining power of the resource-constrained prosecutor is therefore the product of the collective action problem that plagues defendants. This conclusion suggests that, despite the common view to the contrary, the institution of plea bargains may not improve the well-being of defendants. Absent the plea bargain option, many defendants would not have been charged in the first place. Thus, we can no longer count on the fact that plea bargains are entered voluntarily to argue that they are desirable for all parties involved.
-
Type:
Categories:
Sub-Categories:
-
Type:
Categories:
Sub-Categories:
-
Type:
Categories:
Sub-Categories:
-
Type:
Categories:
Sub-Categories:
-
Type:
Categories:
Sub-Categories:
Links:
Physical products, from toasters and lawnmowers, to infant car seats and toys, to meat and drugs, are routinely inspected and regulated for safety. Credit products, like mortgage loans and credit cards, on the other hand, are left largely unregulated, even though they can also be unsafe. Because financial products are analyzed through a contract paradigm rather than a products paradigm, consumers have been left with unsafe credit products. These dangerous products can lead to financial distress, bankruptcy, and foreclosure, and, as evidenced by the recent subprime crisis, they can have devastating effects on communities and on the economy. In this Article, we use the physical products analogy to build a case, supported by both theory and data, for comprehensive safety regulation of consumer credit. We then examine the present state of consumer credit regulation, explaining why the current regulatory regime has systematically failed to provide meaningful safety regulations. We propose a fundamental restructuring of this regime, urging the creation of a new federal regulator that will have both the authority and the incentives to police the safety of consumer credit products.
-
Type:
Categories:
Sub-Categories:
This Essay studies bundling of two (or more) products as a strategic response to consumer misperception. In contrast to the bundling and tying studied in the antitrust literature—strategies used by a seller with market power in market A trying to leverage its market power into market B — bundling in response to consumer misperception may occur in intensely competitive markets. The analysis demonstrates that such competitive bundling can be either welfare enhancing or welfare reducing. The Essay considers several “unbundling policies” that can protect consumers and increase welfare in markets where bundling is undesirable.
-
Type:
Categories:
Sub-Categories:
This Article extends the law-and-economics literature on the foreseeability doctrine and on contract default rules more generally. It derives (numerically) the optimal default cap on contractual damages in a model with a continuum of buyer types and perfect competition among sellers. When communication costs are low, the optimal cap is significantly higher than the damages incurred by the average buyer. A better performance technology reduces the optimal damages cap. Greater homogeneity among buyers increases the optimal cap. The Ar- ticle identifies conditions under which an optimally defined foresee- ability threshold significantly increases welfare. It also explores the normative implications of the doctrinal preclusion of a zero-damages default.
-
Type:
Categories:
Sub-Categories:
Links:
Traditionally, patent protection extended only to full-fledged inventions. In recent years, however, the legal landscape has changed. Patent law is gradually extending its reach to cover "embryonic inventions," and even naked ideas. This Essay has two goals. The first is to present an economic case against extending property rights to embryonic inventions and ideas. Specifically, this Essay argues that property rights in ideas will hinder technological progress. This Essay's second goal is to propose an alternative legal regime that would enhance innovation. To this end, this Essay contemplates the possibility of formalizing a very limited and narrow legal entitlement in ideas in order to establish a marketplace where ideas may be exchanged. After rejecting existing models of property and intellectual property protection as the foundation for a market for ideas, we propose an original market design that could enhance innovation without impoverishing the public domain.
-
Type:
Categories:
Sub-Categories:
Public policy may influence norms and preferences. By altering the payoffs associated with different preferences, public policy may influence the distribution of these preferences in the population. Such interdependence between policy and preferences may limit (or enhance) the effectiveness of different policies. We demonstrate this idea with a simple model of subsidizing contributions to a public good. While the short-run effect of such a subsidy will be an increase in the overall contribution, the subsidy triggers an endogenous preference change that results in a lower level of contribution to the public good, despite the explicit monetary incentives to raise that level. Copyright 2005 Blackwell Publishing Inc..
-
Type:
Categories:
Sub-Categories:
The ideal of individual liberty and autonomy requires that society provide relief against coercion. In the law, this requirement is often translated into rules that operate "post-coercion" to undo the legal consequences of acts and promises extracted under duress. This Article argues that these ex-post anti-duress measures, rather than helping the coerced party, might in fact hurt her. When coercion is crediblewhen a credible threat to inflict an even worse outcome underlies the surrender of the coerced partyex post relief will only induce the strong party to execute the threatened outcome, to the detriment of the coerced party. Anti-duress relief can be helpful to the coerced party only when the threat that led to her surrender was not credible, or when the making of threats can be deterred in the first place. The credibility methodology developed in this Article, descriptive in nature, is shown to be a prerequisite (or an important complement) to any normative theory of coercion. The Article explores the implications of credible coercion analysis for existing philosophical conceptions of coercion, and applies its lessons in different legal contexts, ranging from contractual duress and unconscionability to plea bargains and bankruptcy.
-
Type:
Categories:
Sub-Categories:
This collection of essays explores the most relevant developments at the interface of economics and psychology, giving special attention to models of irrational behavior, and draws the relevant implications of such models for the design of ...
-
Type:
Categories:
Sub-Categories:
Links:
Legal rules do more than provide incentives, they change people. When preferences and norms are endogenously determined via a process of imitation and learning, legal rules, by affecting the market outcome, may affect the dynamics of preference formation. Analyzing the effect of different legal rules should therefore go beyond the analysis of the incentives they provide. It should also include an analysis of their effect on the distribution of preferences and norms of behavior. We illustrate this claim by considering a simple market game in which individuals may have preferences that include fairness concerns. We show that different legal rules change not only the pattern of trade in a market game, but also individuals’ fairness concerns. That is, different rules may eventually make individuals care more (or less) about a fair outcome. Specifically, our model suggests that enhanced remedies for breach of contract may reduce equilibrium preferences for fairness.
-
Type:
Categories:
Sub-Categories:
Arrow's disclosure paradox implies that information that is not afforded legal protection cannot be bought or sold on the market. This paper emphasizes the important relationship between the paradox of disclosure and the boundaries of the firm question. Only legally protected inventions, i.e., patented inventions, may be traded; pre-patent stages of the innovation process may not. Consequently, by force of law, rather than by the guidance of economic principle, pre-patent innovation must be carried out within the boundaries of a single firm.
-
Type:
Categories:
Sub-Categories:
Links:
In consumer contracts highly sophisticated corporations will often exploit consumers’ behavioral biases. Competition cannot cure such exploitation. On the contrary, competitive forces compel sellers to take advantage of consumers’ weaknesses. This general theme is demonstrated through a detailed case study of the credit card market. In designing the credit card contract, issuers deviate from efficient marginal-cost pricing in order to take advantage of consumers’ underestimation of their future borrowing. This prevalent bias explains several unique features of the credit card contract, including high interest rates, zero annual and per transaction fees, teaser rates, high late and over-limit fees, benefits programs, and low (and even negative) amortization rates. The identified market failure suggests that legal intervention may be required to protect consumers and to increase social welfare. Several specific policy responses areconsidered, including disclosure, regulation of unsolicited offers,unbundling of transacting and borrowing services, and usury ceilings. The role of contract law and bankruptcy law is also examined. More broadly, the credit card case study demonstrates that pricing patterns can be used as indicators of a behavioral market failure, signaling a potential role for legal intervention.
-
Type:
Categories:
Sub-Categories:
This paper argues that enforcement of an agreement, reached under a threat to refrain from dealing, should be conditioned solely on the threat's credibility. When a credible threat exists, enforcement promotes social welfare and the threatened party's interests. If agreements backed by credible threats were not enforceable, the threatening party would not extort them and would instead refrain from dealing—to the threatened party's detriment. The doctrine of duress, which invalidates such agreements, hurts the coerced party. By denying enforcement when a credible threat exists, the duress doctrine precludes the threatened party from making the commitment necessary to reach agreement. Paradoxically, the duress doctrine renders performance less likely, thereby reducing incentives to invest. The paper suggests that courts should replace the duress methodology with a credibility inquiry. It discusses factors that would be relevant under such an inquiry. Finally, it demonstrates applications of this approach to leading contract modification cases.
-
Type:
Categories:
Sub-Categories:
Links:
This article questions, and in some contexts disproves, the validity of the efficiency justifications for the comparative negligence rule. One argument in the literature suggests that comparative negligence is the superior rule in the presence of court errors. The analysis here shows the analytical flaw in this claim and conducts numerical simulations -- a form of synthetic "empirical" tests -- that prove the potential superiority of other rules. The second argument in the literature in favor of the comparative negligence rule is based on its alleged superior ability to deal with private information. This article develops a general approach to liability rules as mechanisms that induce self-selection among actors. It then shows that self-selection can occur, not only under comparative negligence, but also under every other negligence rule. These conclusions weaken the efficiency explanation for the growing appeal of the "division-of-liability" principle within tort law and beyond. Copyright 2003, Oxford University Press.
-
Type:
Categories:
Sub-Categories:
Although courts justify the constitutional law of libel with consequential reasoning, the true consequences of liability for harmful speech have never been fully explored. We construct an analytical framework for studying libel law, emphasizing both the positive and negative externalities generated by the publication of information. Our model highlights two distinct decisions that a publisher faces, the verification decision and the publication decision. We first demonstrate that a single damage measure for publication of false libelous information, such as the “damages equal harm” measure, cannot simultaneously induce socially optimal decisions regarding verification and publication. We then argue that the damage measure should depend on the efficacy of the verification process. Interestingly, when verification is reasonably effective, the damage award should be set equal to the social benefit from truthful publication. Our analysis provides a theoretical foundation for important elements of current libel law. It also suggests practicable avenues for reform.
-
Type:
Categories:
Sub-Categories:
This Essay demonstrates the strategic advantage of narrow patents and unprotected publication of R&D output. Broad patents might stifle follow-on improvements by deterring potential cumulative innovators, who fear being held up by the initial inventor at the ex post licensing stage. By opting for a narrower patent and unprotected publication, the initial patent holder commits not to hold up follow-on inventors, thus promoting sequential innovation and generating lucrative licensing fees. Counterintuitively, in cumulative innovation settings, less protection benefits the patentee. This finding may serve as a counter-force to the much-lamented "anti-commons" problem. More generally, our theory demonstrates that the divergence between private interests and social objectives - on both the static and dynamic dimensions of intellectual property - is not as great as conventionally believed. Our theory bridges yet another gap; that between the two main theoretic strands in patent law scholarship - the property rights perspective and the information revelation perspective. It also explains the recent trend toward unprotected publication of information. Finally, we propose an important reform of the novelty requirement in patent law that would further encourage narrow patents and unprotected publication by bolstering the credibility of a patentees commitment not to patent previously published research findings.
-
Type:
Categories:
Sub-Categories:
Links:
This paper develops a model of the causes and consequences of misreporting of corporate performance. Misreporting in our model covers all actions, whether legal or illegal, that enable managers of firms with low value to make statements that mimic those made by firms with high value. We show that even managers who cannot sell their shares in the short-term might misreport in order to improve the terms under which their company would be able to raise capital for new projects or acquisitions. When managers may sell some of their holdings in the short-term, incentives to misreport and the incidence of misreporting increase to an extent that depends on what fraction of their holdings managers may sell and on whether they can sell without the market knowing about it. Investments in misreporting have real economic costs and distort financing and investment decisions, with firms that misreport raising too much equity and firms that do not misreport raising too little. A lax accounting and legal environment increases the incidence of misreporting and consequently the distortions in capital allocation. Our analysis provides many testable predictions concerning the times, industries, and types of firms where misreporting is likely to occur. The analysis also has implications for corporate governance and executive compensation.
-
Oren Bar-Gill & Michal Barzuza, The Market for Corporate Law (NBER Working Paper No. w9156, Sept. 2002).
Type:
Categories:
Sub-Categories:
This paper develops a model of the competition among states in providing corporate law rules. The analysis provides a full characterization of the equilibrium in this market. Competition among states is shown to produce optimal rules with respect to issues that do not have a substantial effect on managers' private benefits but not with respect to issues (such as takeover regulation) that substantially affect these private benefits. We analyze why a Dominant state such as Delaware can emerge, the prices that the dominant state will set and the profits it will make. We also analyze the roles played by legal infrastructure, network externalities, and the rules governing incorporations. The results of the model are consistent with, and can explain, existing empirical evidence; they also indicate that the performance of state competition cannot be evaluated on the basis of how incorporation in Delaware in the prevailing market equilibrium affects shareholder wealth.
-
Type:
Categories:
Sub-Categories:
Links:
Litigants are unrealistically optimistic with regard to the probability of prevailing at trial. This systematic bias is well documented, and has been often invoked to explain breakdowns in pre-trial settlement negotiations. Contrary to existing models that allow for optimism as an exogenous assumption, the present study derives this cognitive bias endogenously. It thus provides a theoretical foundation for optimism in litigation. Quasi-evolutionary forces - market pressure (in the market for legal services) and imitation processes - are shown to favor cautiously optimistic litigants. Moreover, the endogenous optimism model enables an examination of the factors that determine the magnitude of the optimism bias. In particular, it is shown that the legal environment influences the equilibrium level of optimism. Focusing on rules for the allocation of litigation costs, the American rule induces a higher level of optimism, as compared to the British rule. This finding qualifies the conventional wisdom regarding the advantage of the American rule in fostering settlements. Finally, the present analysis is offered as an illustration of a broader theme, that the law can play an important role in determining the types and magnitudes of prevailing cognitive biases. The identification, characterization and analysis of this perception-shaping role of legal institutions are a novelty of the present study. Behavioral law and economics is revealed as a two-way, rather than a one-way street. Not only do cognitive biases affect the operation of legal rules, but also the legal rules themselves influence the types and magnitudes of observed biases.