Seduction by Contract

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. What makes Bar-Gills argument both fresh and impressive is its detailed exploration of actual consumer markets and its careful argument that myopia, unrealistic optimism, and a lack of salience are playing a significant role in those markets. Cass Sunstein, The New Republic Exceptionally illuminating and packed with findings and ideas. Seduction By Contract is important reading for those interested in behavioral economics, human behavior, and some of the most important policy debates of the current decade." Cass R. Sunstein, Felix Frankfurter Professor of Law, Harvard Law School and former Administrator, White House Office of Information and Regulatory Affairs Professor Bar-Gill, a pioneer in the injection of psychological realism into economic analysis of law, has written a very timely and very important book on consumer contracts, and specifically on the ominous ingenuity with which modern marketers exploit the incapacity of so many consumers to understand complex contractual terms, especially relating to credit. His book will inform administrative and judicial regulation of consumer contracts. Judge Richard A. Posner This book shows why Oren Bar-Gill was the first winner of the American Law Institute's Young Scholars Medal. Economics and psychology are melded to explain legal reforms that would improve the contractual rights of consumers who obtain credit cards, mortgages, or cell phones. This is first-class legal scholarship that can influence public policy. Lance Leibman, Director, American Law Institute As Oren Bar-Gill's designated rational choice "nemesis," I applaud his ambitious efforts to account for the role of human error in the full range of consumer transactions. His bold claim that product and service providers, even in competitive markets, are able to manipulate the terms of standard form contracts to their private advantage, if sustainable, creates a prima facie case for government regulation of these consumer markets. Bar-Gill's work promises to be at the center of a continuing debate of national importance. Richard Epstein, Laurence A. Tisch Professor of Law, New York University School of Law Oren Bar-Gill argues that consumer contracts are often both inefficient and exploitative in predictable ways, and illustrates with case studies. The claim is provocative but plausible, and the analysis addresses many of an economist's follow-on questions. I look forward to teaching from this book. Joseph V. Farrell, Professor of Economics, University of California, BerkeleyIntroduction ; 1. The Law, Economics, and Psychology of Consumer Contracts ; 2. Credit Cards ; 3. Mortgages ; 4. Cellphones ; 5. Conclusion