Wednesday, November 28, 2012

Oren Bar-Gill's "Seduction By Contract"

Oren Bar-Gill is a Professor of Law and co-Director of the Center for Law, Economics and Organization at the New York University School of Law. Bar-Gill joined the NYU faculty in January 2005 from Harvard University, where he was a Fellow at the Society of Fellows, as well as an Olin Fellow at Harvard Law School. Bar-Gill holds a B.A. (economics), LL.B., M.A. (law & economics), and Ph.D. (economics) from Tel-Aviv University, as well as an LL.M. and S.J.D. from Harvard Law School.

He applied the “Page 99 Test” to his new book, Seduction by Contract: Law, Economics, and Psychology in Consumer Markets, and reported the following:
Opening Seduction By Contract on Page 99 takes you to the book’s Credit Cards chapter – a case study of contracting practices in the credit card market, how these practices hurt consumers and what the law can do to help. Earlier in the chapter, I explain how the interaction between market forces and consumer psychology distorts competition in the credit card market. Many consumers are myopic and optimistic. They care more about short-term prices and less about long-term prices. Accordingly, issuers compete by offering short term-perks, like no annual fees and low (or zero) introductory interest rates; and recoup their losses by imposing high long-term costs, like late fees and penalty interest rates. Page 99 asks whether this distorted competition hurts consumers. It may be thought that consumers are not harmed by these temporal pricing shifts, that the short-term perks compensate consumers for the long-term costs. But, the chapter shows, this is not the case. The deferred-costs strategy distorts both product-choice and product-use decisions, hurting consumers and reducing market efficiency. Page 99 goes on to evaluate how the pricing distortions in the credit card market increase the likelihood of financial distress or exacerbate the costs, to cardholders, from financial distress.

The credit cards case study is followed by two other, detailed case studies – of the mortgage market and the cellphone market; and it is preceded by a general chapter that offers a theoretical analysis of contracting practices in consumer markets and their normative implications. Consumers routinely enter into contracts with providers of goods and services. These contracts are designed by sophisticated sellers to exploit the psychological biases of consumers. They provide short-term benefits, while imposing long-term costs – because consumers are myopic and optimistic. They are excessively complex – because complexity allows sellers to hide the true cost of the product or service from the imperfectly rational consumer.

The book outlines a promising legal policy solution to these problems: Disclosure mandates. Simple, aggregate disclosures can help consumers make better choice. 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.
Learn more about Seduction by Contract at the Oxford University Press website.

--Marshal Zeringue