Oren Bar-Gill: Frontiers of Consumer Law

Oren Bar-Gill: Frontiers of Consumer Law

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MARTHA MINOW: Good afternoon. I’m Martha Minow, and I’m the
dean of Harvard Law School. And it gives me enormous
pleasure to welcome you here to this very special event. We will honor Oren Bar-Gill on
his appointment as the William J. Friedman and Alicia
Townsend Friedman Professor of Law and Economics. And you can join me. [APPLAUSE] I’m going to tell you a
little bit about the chair, and then a little bit
more about our honoree. So William Friedman
was a native of Chicago and a graduate of the
University of Chicago before he came to
Harvard Law School. He was a member of the
Harvard Law Review. And he returned to Chicago
and practiced there for 70– seven zero– years. OK? He helped to organize the
Hilton Hotel Corporation. He also became one
of the two investors to buy the Empire
State Building. He was active as
a philanthropist. He served as vice
president and director of the Combined Jewish Appeal. He sat on the board of directors
of the Menniger Foundation. His wife, after
William passed away, designated that
following her death, there would be a gift
to Harvard Law School. And that gift is this chair. I want to note two
more things about him. Friedman was himself
instrumental in designing and effectuating the merger of
mass transit lines in Chicago. Anyone been to Chicago, you
know there’s the elevated train and there’s the surface trains. And William Friedman organized
the way to connect them. Hold on to that thought. Because there’s going
to be a connection. And the other– get it? Connection? And the other comment is
that from all accounts, he was simply a lovely,
lovely human being. Another connection. So we turn now to talk about
Oren Bar-Gill, who, let me say, is a loving, wonderful,
generous, and beloved person, who knows how to connect things
and connect them brilliantly. He connects complex
systems of thought. He connects law, psychology,
economics, theory, practice– so he’s going to be
embarrassed, but I’m going to say more stuff about him. He received his
bachelor’s in economics from Tel Aviv University. He earned a master’s in law
and economics, and LLB in law, and a PhD in economics. He then received his LLM from
Harvard Law School and his SJD. He was an Olin
Fellow here, and he received the Olin Prize for
best paper in law and economics. He also was nominated
for and selected for the Society of Fellows
at Harvard University, where we actually first met. Because the Society of Fellows
is an extraordinary place designed by a former
president of the university for people who actually are
better than faculty members. The idea is to find the very
best people on the planet, and give them time and money
to do their own research with no obligations. Oren Bar-Gill was selected
for one of those fellowships and he dazzled
everyone, including me. He joined NYU as an
assistant professor, and within three years was
promoted to Professor of Law and became the co-director of
NYU’s Center of Law, Economics, and Organization. He also received
the Best Paper Award from the American College of
Consumer Financial Services Lawyers. And his work on
consumer contracts was recognized by
the American Law Institute, which awarded him its
inaugural Young Scholars Medal. And then one of the
happiest days of my life, not just as dean but as a
member of this community, was to convince Oren Bar-Gill
to come back to Harvard. And such joy, truly, truly. He currently serves together
with Omri Ben-Shahar and Florencia
Marotta-Wurgler as reporter for “The Restatement of the
Law, Consumer Contracts.” He also is a co-director at
the [? Carmichael ?] Fellows Program. He also has served on the
Harvard Law School faculty hiring committee. He is indispensable, but
now about his scholarship. Oren has quickly
established himself as a leading expert on
the law and economics of contracts and contracting. He’s exceptionally creative. The work draws on and advances
law, economics, and psychology. He’s a pioneer in bringing
a psychologically realistic perspective to how
consumer contracts work, how credit cards work,
how we don’t understand the ads that come to
us, and nonetheless sign up for the credit cards. And his work marvelously
bridges theory and practice, which means that he’s been able
to influence public policy. His wide publications across
law reviews and journals include publications
in the Journal of Legal Studies, Cornell Law
Review, University of Chicago, American Economics
Journal, and many more. His work is cited widely. He’s placed among
the top most cited faculty members in the Social
Science Research Network. He’s very well known for his
book, Seduction By Contract– good title– Law, Economics, and the
Psychology in Consumer Markets. And in that book,
he explores tensions in a world where
consumers are often, let’s say, less than
rational and short sighted, and not well equipped
to manage the seller’s complex, long-term contracts
that, let’s be clear, have been carefully
crafted to be confusing. Better legal policies to
promote mandatory contractual disclosures could help
both buyers and sellers, he notes and he argues
and he develops. He also, wonderfully,
has developed accessible explanations of the complex
workings of consumer behavior, of markets, and of contracting. And this level of clarity, and
his contributions to knowledge, have improved the advice not
only to consumers, but also to consumer advocates
and law reformers, notably in the field of
cell phone contracts. Richard Posner said,
“This is important work. This injects
psychological realism into the economic
analysis of law.” Not bad for the guy
who founded the field. Richard Epstein, who
calls himself Oren’s designated rational choice
nemesis, more on that later. He says, and I quote him, “He
applauds the ambitious effort to account for the
role of human error in the full range of
consumer transactions. Oren’s 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 facia case for governmental
regulation of these consumer markets.” Richard Epstein
says he convinces me there should be regulation. This is unbelievable. And Oren says, “Richard
Epstein promises to be at the center
of continuing debate of national importance.” Oren’s work includes
model designs for default contracts
that allow consumers to choose contract
terms that best match their own preferences. His work covers a
range of topics, from property rights and
misperceptions in consumer markets, and it’s remarkably
practical while being theoretically
precise and rigorous. A student of Oren’s recently
said that in Oren’s class, there were discussions of
zombie contracts, the kinds of contracts that automatically
renew on your credit card, like subscriptions to magazines
that you haven’t recently renewed. And because of the
class discussion, the student said he has now
invested in and developed a new tech company that will
help detect this as a problem, help identify these contracts
on your credit card bill, and negotiate to
terminate and refund. Not bad for a day’s work. Oren said he is glad that
his student was applying his lessons to the real world. And he said, and I
quote Oren, “Law school, it’s not like theoretical
math department. We do want to influence
the real world. Sometimes we do it through
the courts or discussions and involvement with
regulators and legislators, but I think it often
happens through engagement with the market and
the private sector.” OK, I’m almost done, but
first I have to indicate the result of crowdsourcing. Cass Sunstein says, “Oren is
as interesting and rigorous and playful as any law professor
in behavioral economics and law,” and a Cass
goes on and says, “I can sum up Oren in
one word, tremendous.” Steve Shavell said they
like to play tennis together and gossip. I’m not going to go
further with Steve Shavell. Lucian Bebchuk says, “When
Oren came to Harvard Law School and I became his
supervisor, I saw right away that he was extremely smart. That did not take
much observing. Next, I learned over time
some other qualities– his gracious, kind,
and gentle manner, and his seeming to be
never under pressure. Last, when I offered him work
on some joint research projects, I learned his
exceptional effectiveness and remarkable speed. We would meet to
discuss revisions, and I would say this could
take many, many days, and reorganization,
and significant work. But generally Oren would email
me the completed revision that night or the next day. I couldn’t believe it, but then,
as it kept happening, I did. I realized that Oren
was, in this respect as in many others,
very special.” Gabriella Blum calls
Oren, and I quote, “A daunting but
wonderful co-author. You run an idea by
him, and he sends you a full draft within 24 hours. Sometimes the draft has
too many Greek letters and equations in it, but
otherwise it is perfect.” She also notes,
and again I quote, “Oren beats his kids in video
games, which is highly unusual. He even does Xbox Dance
and is excellent at it. He and Sigal are
quite good dancers, and put everyone to shame
on the dance floor.” Overall [? Gabi ?] says,
Oren is, and I agree, “the sweetest, most generous,
most dedicated colleague one could ask for.” I think we’ve sufficiently
embarrassed you. I hope that you will stay not
just only for this lecture, but also for
reception afterwards. And now I am with great
joy, happy to introduce, Oren Bar-Gill, the
William J. Friedman and Alicia Townsend Friedman
Professor of Law and Economics. [APPLAUSE] OREN BAR-GILL: Thank
you so much, Martha, for this generous introduction– A bit too generous,
but I’ll take it. Also, thank you, Martha, for
your support and friendship, and most importantly for
bringing me back home to Harvard Law School. It is very special for me to
be appointed to the Friedman chair, first for the
accomplishments of William Friedman himself, but also
is very special for me to inherent to the chair
that my teacher and mentor Lucian Bebchuk held before me. I can say with confidence
that I would not be standing here today if it
were not for Lucian Bebchuk. I’m also extremely grateful
to my colleagues, teachers, and friends, and, of
course, to the students who came here, thank you
so much for being here. But I have to end
most importantly by thanking my family. I want to start by
thanking my parents, [? Aharon ?] and [? Nechama, ?]
who came from Israel for this event. [APPLAUSE] Again, I would not be
here without their love and support
throughout the years. I want to thank my children,
Noam and [? Guy, ?] you are the light of my life. And last but not least, where
is my, oh, I forgot my sister. She’s sitting over
there, thank you. My sister [? Sagit, ?]
and my brother [? Nir ?] who is in Israel. And last but not least,
my lovely wife Sigal. I don’t know where I would
be without our partnership and love. So thank you for indulging me
in this kind of Oscars-type thank you thing. I was told on good authority
by some very smart people that I am unlikely to actually
receive an Academy Award. And also just yesterday
Lucian told me in confidence that I am also unlikely
to receive a Nobel Prize. So it seems like this is my
last chance to publicly thank these very important people. OK, so now to the topic
of the talk today. I want to talk about
frontiers in consumer law. The problem in
consumer law begins with imperfect information
and imperfect rationality. And all of this starts
with a mere fact, a really important
and basic fact, that consumer contracts are
exactly the type of contracts that we never read. Why don’t we read them? Because they’re really long. This is not just figuratively. They’re literally long. So this handsome
gentleman over here is my friend and
colleague, Omri Ben-Shahar, who actually took the time to
print out and glue together the iTunes terms and
conditions contract and hang it from the ceiling of
the University of Chicago Law library. So you see this is really a
lot, a lot of fine print terms. And so it’s, of
course, not surprising that we decide not to read it. It doesn’t make
sense to read it. In fact, it’s probably
irrational to read it. We don’t read it
because it’s very long. We also don’t read it
because even if we read it, we probably would
not understand it. The fact that you would
not understand if you read is a good reason not to
read in the first place. Now, why wouldn’t
we understand it? First, because of all
this kind of legal jargon in the fine print, that most
lawyers don’t understand, let alone lay people. Beyond that, even looking
outside of the fine print, looking at the business
terms of contracts, like price, terms that we are
supposed to, in fact, notice, and look at, and search for
when we’re comparing products, even with respect to these
types of non fine print terms, would be very difficult for
us to understand them and take them into account in a rational
way in our decision making as consumers. The reason for that is that in
many of these consumer markets, many of these
consumer contracts, the price terms are
multi-dimensional and complex to a level that
is very difficult to penetrate and understand. These problems of imperfect
information and imperfect rationality lead to bad
outcomes in consumer markets. And so here is a
caricature of what happens when
frequent flyer reward miles don’t really
turn out to be what you expected them to be. Now, obviously this
is a caricature, but it captures something
really important and real in consumer markets. This is the reality where
sellers and service providers promise you a lot in
their advertisements, but then try to undermine
and qualify and limit these promises in
the fine print. And this is not limited
to award flights. Just recently in the news
and all abuzz social media, we’ve seen what United
has done and how it has tried to justify it
through their fine print. Another type of bad
outcomes, another example comes from mortgage markets. Another really important
type of consumer contract. And we know that when consumers
enter into these mortgages, sign up for these loans without
really understanding what they say, what are the implications
in terms of costs over time, the results can be very
painful and very costly. And so we have these
problems in consumer markets, and the question for us
as lawyers in law school is, what should
we do about them? What can we do about them? What are the legal
and regulatory tools at our disposal to try to
protect consumers and prevent these bad outcomes
from taking place? You know, of course,
I can’t go over all of the tools available in
our legal arsenal today, but I want to focus
briefly on four categories of regulatory techniques. Talk about disclosure
mandates, about default rules, about price caps, and about
contract law doctrine itself. Let me start with disclosure. And the first thing
I want to emphasize is that when we’re talking
about disclosure, at least now when we’re talking
about disclosure, we’re not talking about
this type of disclosure. I call this the old disclosure. When the law forces
sellers to give you all the terms of the
contract in advance, that is a type of
mandatory disclosure. There are many other
examples the law requires very extensive,
lengthy disclosure of terms. Of course, I’m Xing this out,
because it’s clear to everybody that this is completely useless. It’s useless for the reason that
we mentioned, nobody reads it. So when I’m talking
about disclosure mandates and disclosure mandates that
can actually help consumers, I’m talking about these
new types of disclosures. Sometimes they’re called
smart disclosures, because stupid disclosures
don’t make much sense. And when we’re talking
about these new disclosures, we’re referring to
these short summary disclosures the
consumers can quickly read and quickly understand. One example of these
types of disclosures is the Schumer box
for credit cards. Another type of new disclosure
would be a GMO warning. Again, these are the type of
disclosures, as you can see, they’re very different from
the very long fine print terms of the iTunes contract. These are things that consumers
can readily observe, see, understand, and act upon. And so when we’re talking
about these new disclosures, we’re talking about
disclosures that are effective, that can actually
influence behavior, which is not true with the old
disclosures that nobody reads. Those can’t influence behavior. But once we are in the realm of
disclosures that can actually influence consumer behavior,
it’s really important that we make sure to
influence consumer behavior in the right direction. And there is really important
challenges in the design of these disclosures. Now, this was not a problem
with the old disclosures. They couldn’t influence
consumer behavior and that’s why we didn’t
care about what they said. OK? For these new
disclosures we do care. And therefore, it’s
really important to design them in
a very careful way. And if we don’t design
them in a careful way, some bad things can happen. OK, so let me give
you an example. And this is an example
from recent work that I’ve done with Cass
Sunstein and David Schkade And what we did in this paper
is try to understand, identify, and measure the problem of
false inferences from disclosure mandates. To understand this problem, let
me start with step number one, and suggest to you that the
effect that disclosure mandates have on consumer behavior
depends on the motives that consumers attribute
to the regulators that have decided on this
new type of disclosure. So in particular, if
we’re thinking about say, GMO disclosures. It really matters what is the
reason, in consumer’s mind, why the regulator have decided to
mandate a GMO type warning. For example, if consumers
think that the reason why a regulator mandated
this type of warning is because the regulator
received new research suggesting that GMO foods
are hazardous to our health or to the environment,
then consumers are going to increase their
beliefs about the risks associated with these products. So this is what you see here. So this is the lighter
bars on the left. When we move from no
disclosure to disclosure, and consumers think that the
decision was based on research, then their posterior beliefs
about the risk associated with the product goes up. On the other hand,
if consumers believe that the regulator, in deciding
on this disclosure mandate, was motivated by politics,
by interest group pressure, then we have a very different
effect on consumers’ risk attitudes or risk beliefs. And so you see here, on the
politics, the darker bars, actually the perceived risk goes
down when the regulator chooses disclosure over nondisclosure,
chooses to mandate disclosure. And so this was step
number one in the analysis, to show that consumers beliefs
about the motives of regulators has an important effect on
what inferences consumers draw from the regulator’s decision
to mandate disclosure. And now to the
second step, and this is the false inference step. The problem is
that many consumers hold false beliefs about
the motives of regulators. They don’t know why
a regulator decided to mandate GMO disclosure. Indeed, in the GMO
context, the problem was that many consumers
thought that the reason for the disclosure
mandate was research, when in fact, it was not. And this causes a problem
of false inference. Indeed, it causes
consumers to overestimate the risk associated
with GMO foods, which will lead consumers to buy
less of these GMO foods, which is then harmful to consumers and
interferes with the efficiency of the market. Let me briefly mention just
one other potential motive– in fact, not a
potential, a real motive for this type of disclosure. So, indeed, what happened when
the regulators were considering the GMO disclosures,
many of them thought that the
reason or justification for this disclosure
was a right to know. They thought that
consumers have a right to know what they’re
eating, regardless of any risks or hazards
associated with this food, with GMO foods. Now, if you’re a
rational consumer and you believe that this is
the motive, the right to know, then you shouldn’t change your
perceived risk of the product. But what you see here– and
these are kind of the lights, it’s not very well
legible bars– you see that here also
there is an increase when consumers think that
the motive is right to know. Now, it could be
that these consumers are imperfectly rational. It could be that
they’re conflating a right to know with actually
new research of harm from GMOs. But for whatever reason, this
exacerbates the false inference problem and interferes with
the efficiency of markets. Again, I’m not saying that
disclosure mandates are bad. I’m a believer in
disclosure mandates when they are well-designed. But this suggests that we should
be very careful in our choices, whether to disclose
or not to disclose. Still on disclosure mandates,
talking about these frontiers of consumer law and disclosure
regulation, what I’ve said so far has been focusing
on disclosure mandates that are designed to facilitate
consumers’ deliberative thought process, using
what psychologists call System 2 processing. So the idea here is
we’re providing consumers with information. They’re incorporating
this information into their deliberative decision
making process, and therefore, making better
decisions hopefully. But there is another
type of disclosure. There’s a type of disclosure
that rather than invoking a deliberative
System 2 processes, actually targets the intuitive–
the emotional or affective– system one processes
in our brain. And so a prime example here
are these graphic disclosures, these cigarette warnings. They’re not designed to
provide you information in kind of a rational deliberative way. They’re provided to elicit
emotional responses, of fear and disgust. They’re also very effective
in influencing behavior, but through a very
different channel. And so when we’re
taking together both of these types of
disclosures, the smart System 2 disclosures and also the
system one disclosures, we see that disclosure can be
very effective in influencing behavior. And this is a good
thing, I would argue. But it’s also
something that requires caution and deliberate design
by regulators and policymakers. When we were talking about
the old fashioned disclosure, people said– and this was often a
political consensus– why not just add a disclosure mandate? The industry was happy
with this because it really didn’t do anything. And legislators and lawmakers
thought, well, at least we’re doing something in
response to a problem. And the general idea
was that we can actually feel like we did something, but
without really doing something. And disclosure was
always presented as this kind of soft
type of intervention, non-paternalistic type of
intervention in markets. With respect to new disclosure,
this is no longer true. We’ve seen that these
new disclosures– of the summary disclosures,
GMO disclosures, System 1 disclosures– they are
very powerful in effecting market outcomes. And so we can no longer say,
well, this is just disclosure. It’s not paternalistic. There’s a real question
of paternalism. This doesn’t mean that
we shouldn’t do it. It just means we should
be careful in doing it. Let me move quickly
from disclosure to the second regulatory
tool that I mentioned, and that is default rules. Default rules have been used
by policymakers increasingly. And in many cases, these
default rules are very powerful. Maybe the now classic example
from this Johnson and Goldstein study is the use
of default rules in the organ donations context. So what you see here is the
percentage of organ donors in a country’s population. And what you see among these
different European countries, that in some countries, the
blue countries, almost everyone is an organ donor. And on the other hand,
in the orange countries, very few people
are organ donors. Now, it turns out
that the reason for the difference between
these blue and orange countries is just the default
rule that was chosen. So in the orange
countries, when you go to get a driver’s license,
in the DMV, you fill this form. And one of the
questions on the form is, if you want to be an organ
donor, check the box here. In the blue countries,
you, again, go to the DMV, and you fill a form,
but then the question is, if you do not want
to be an organ donor, check the box here. And it turns out that those two
words, the switch of default, has a huge effect. It’s basically almost as
strong as a mandatory rule. And, of course, the
impact of this type of policy in terms of lives
saved from the more organs that we have is super important. So this is an example
of a default rule that is very powerful,
or we can also say very sticky, meaning
that only a few people choose to opt out of the default. But
defaults are not always sticky. And so this is another
example, taking us back to the world of
consumer contracts, when we’re talking about the
bank contracts that we have, say when we open a checking
account, in the US, the traditional rule was a
rule that when you sign up for a checking account,
you automatically get what is called overdraft protection. And this means that if you
use your debit card, charge your debit card, try
to purchase something, and you overdraw your
account, the bank is going to kind of honor
and allow this purchase, but of course, tag
on an overdraft fee. So this was overdraft
protection and this was the default for many years. Recently the law in
the US has changed. The default has moved from
the default of yes protection, to a default of no protection. And now consumers need
to deliberately opt into overdraft protection. Now, this default, however,
was much less sticky turns out than the organ
donations default. And we see that a very large
number of consumers opted out. And the question is why? Why is one default so sticky
and another is not so sticky? And so we have many stories
and potential explanations. One explanation
is that the banks, they invested a lot
of money and effort in order to make
sure that consumers opt into overdraft protection,
because they make a lot of money out of overdraft fees. So that is one explanation,
probably a lot of truth to it. But it is also truth
that we don’t really have a good theory of default rules. And so in a recent paper
with Omri Ben-Shahar, we started to develop
such a theory. And this theory is
based on the assumption that consumers
initially are often uninformed about important
aspects of the decision. So in particular, we
assumed that there are two types of consumers. Some consumers really
don’t need and don’t want overdraft protection. Other consumers do want and
need overdraft protection. But initially,
consumers don’t know if they are part
of the first group or part of the second group. They might not know
what exactly is the cost of overdraft
protection– how are these fees
calculated, how high they are. They might also not know
what is the likelihood that they would need to
overdraw their checking account. How often will this happen? Will they have another method
of payment available or not? So all of this information is
information that many consumers often do not have initially. But they can get
this information. They can invest time and
effort, sometimes money, to become informed. And one of the other kind
of elements of this analysis is that these costs of
information, these information costs, are heterogeneous. For some consumers, they can
get informed very quickly with a very low cost
or low investment. For other consumers, it’s
very difficult and costly to become informed. And so what happens as an
outcome of this analysis, one of the result
is that you will see some consumers,
those consumers usually with lower information costs. These consumers will
become informed, and if they learn that they are
in fact part of the group that actually benefits from
overdraft protection, they will opt out
of this new default and get the protection
that they need. And this theory also tells
us, or allows us to predict, what type of defaults
and what types of markets will be more sticky and which
defaults will be less sticky or actually kind of slippery. And this all depends
on the distribution of information costs. If many consumers have
low information costs, defaults are going
to be more slippery. If more consumers have
higher information costs, then defaults are
going to be stickier. This type of framework also
allows us to provide guidance to policymakers about how to
choose the optimal default. Is the optimal default
yes overdraft protection, or is the optimal default
no overdraft protection? And again, as we
discussed in this paper, this choice, or the design
of the optimal default, depends both on the
distribution of types, the different
types of consumers, and the distribution
of information costs among the consumers. The third type of
regulatory tool that I wanted to discuss
with you is price caps. This is based on
an article that I had written in the
Journal of Legal Studies. This is an article that looks
at the use of price caps, and specifically the
use of price caps in markets with
multi-dimensional pricing. And again, this is a very large
subset of all consumer markets and consumer contracts. It’s just kind of a
partial list of markets. Credit cards, mortgages,
cell phones, air travel, hospitality. In all these
markets, as you know, price is multi-dimensional. So this is not like
buying a carton of milk in the supermarket when
there there’s just one price. In all these examples,
price is multi-dimensional with different rates
and penalties and fees and other prices
associated with it. And in many of these
markets, lawmakers– these can be regulators, and
legislators, and even courts– they might decide that
one price is too high. Might actually be
too high, and they will then intervene to cap
this price, to push it down. And this has happened
again in the credit cards market, the mortgage market,
in the cell phone market, and so forth. Oftentimes, we see these
types of interventions through price caps
by regulators. The problem,
however, is that when we’re talking about markets
with multi-dimensional pricing, the fact that you
push one price down is not the end of the story. It’s just the
beginning of the story. So just imagine that you have
only two prices in a market. So assume you’re thinking
about credit cards, that you have one price
which is an annual fee and another price which is
a currency conversion fee. The annual fee is down. The currency version
is very high. And the regulator
steps in and pushes, via price cap, the currency
conversion fee down. What would you
expect banks to do? They would probably just
increase the annual fee. And if that is
what happens, then, the purpose of this
regulation, of this cap, which is to reduce the overall price
and cost that consumers pay, might be frustrating. So this is a reason for
concern, or at least caution about price caps. But I want to suggest
that even with– oh, I forgot to tell you about my
whack-the-mole illustration, right? The idea here is this is
like whack-the-mole game. You push one price down,
the other one pops up. And because of this
reason, as I suggested, that there might be some caution
about the use of price caps. But I want to actually
argue that even with this whack-a-mole
problem, in many cases it is actually beneficial. Price caps can actually do
good and help consumers. And the reason for
this is the following. You need to imagine
and understand why the pre-regulation
pricing scheme looked the way that it did. Why were annual fees low and
currency conversion fees high? The reason was that annual fees
are very salient to consumers. And so competition
focuses on this dimension and pushes this price down. Currency conversion fees, on
the other hand, are non-salient. They’re basically
invisible to consumers, and therefore sellers
can raise them up. Now what happens when we
have a regulation that pushes the currency
conversion fees down, and the annual fees then go up? What happens is
that now consumers have a much better sense of what
the true cost of this product is to them. Before the regulation, they were
focusing on annual fees which were very low, they were
ignoring the currency conversion fees,
and they thought that the overall product
or service is very cheap. And they mistakenly
demanded too much, bought too much of this
product or service. Now that the currency
conversion fees went down and annual fees went up, annual
fees are salient to consumers. They now have a better sense of
the true cost of the product. And so even though we don’t
have an overall reduction in the price that
consumers pay, consumers are now able to make more
informed, more rational decisions. The final regulatory or legal
tool that I want to discuss is contract law doctrine itself. And this discussion will be
kind of based on our attempts in the draft, “Restatement
of Consumer Contract Law,” that Dean Minow mentioned,
our attempt to kind of nudge and push the doctrine
of contract law in a slightly more
pro-consumer direction. And the way we try to do this
is by adjusting or restating two major doctrines,
two important doctrines in consumer contract law. This is the doctrine
of unconscionability and the doctrine of deception. So let me start with
unconscionability. As many of you
know, contract law uses unconscionability doctrine
in order to strike down or gives courts the
power to strike down bad terms in contracts. Unconscionability
doctrine has two prongs under US contract law. It has a substantive
prong, which looks at how unfair or
one sided the term is, but it also has a
procedural prong. This procedural prong is
kind of traditionally defined through these formulas of the
absence of meaningful choice or unfair surprise. The problem has been, however,
that courts are struggling to understand and apply
in a consistent way these formulas of meaningful
choice and unfair surprise. And so our suggestion
in the draft restatement is to use this notion of
salience taken from psychology and behavioral economics
to provide some more content, and
some more logical and consistent guidance,
to the operation of procedural unconscionability. The idea here is that if the
term is salient to consumers, namely it affects the
contracting decisions of many consumers, then we
don’t need courts to police it, because market forces
are going to do a pretty good job on their own. On the other hand, if we have
a term that is non-salient to consumers, namely
invisible to consumers– and that’s probably
most of the fine print– then we cannot rely
on market forces. And this is exactly when we
need courts to intervene. And so the idea here is to
understand or reconceptualize procedural unconscionability
through this notion of salience. The second doctrine
that I want to mention is the doctrine of deception. And in fact, this
is kind of deceptive because there is no
doctrine of deception per se in consumer contract law. So contract law
has these doctrines of fraud and misrepresentation,
but the problem with these doctrines is that
they’re relatively narrow. It’s very hard for consumers
to effectively invoke them. And so what we are trying
to do in this restatement is to broaden these doctrines of
fraud and misrepresentation, and replace them with
something more flexible, something more powerful like
this notion of deception. And in doing so, we borrow
from the parallel field of consumer law. The jurisprudence developed by
the Federal Trade Commission as it’s applied
section 5 of the FTC Act, the section that prohibits
unfair or deceptive acts and practices. And by doing so, we’re
hoping to give courts more power even when they’re
applying contract law in order to protect consumers
from deceptive practices. And again, this goes
back most prominently to that, one of the
initial examples that I started with, the very
common situation where sellers promise you one thing
in an advertisement, and then try to undermine and
qualify in the fine print. So let me briefly conclude
the beginning of all this discussion is the
existence of a market failure in many consumer markets, or
at least for many consumers in consumer markets. And this is a
market failure that begins with the problems
of imperfect information and imperfect rationality. And then we need
to ask ourselves what can the law do about this? I’ve discussed four possible
legal tools that we use– disclosure mandates,
default rules, price caps, and contract law doctrine. I think that all of
these tools are valuable. They’re promising. They all can be used
to protect consumers. But as we’ve seen, with
respect to all of these tools, we need to be very
careful in how we think about them,
how we design them, when we choose to invoke them. Because if we don’t,
we might end up doing more harm than good. Thank you very much. [APPLAUSE] MARTHA MINOW: Will
you take questions? OREN BAR-GILL: Happily. MARTHA MINOW: That was
completely marvelous. I have a two-part question. Do you think that
the salience insight is altered if people
know that they were affected by what’s salient? And if also the
sellers know, will that produce a new kind
of whack-a-mole? And then the larger
question that grows from that is, do you
think that there are ways that the kind of empirical
research that you have done so much to advance can be
mandated in the law, that there should be a consumer
impact test or rational basis analysis under
administrative law should require some surveying
of this kind of research? OREN BAR-GILL:
Right, so thank you. So the question of
salience and how sellers will respond to this
type of doctrine I think is a really important question. Before I give an example
of how important it is, I want to emphasize, though,
that in many situations, in many consumer
contracts, we’re talking about very
lengthy fine print terms which are non-salient. And it’s impossible
to make them salient. There are many
examples in the law, including the Uniform
Commercial Code, where sellers are offered these safe harbors. If you make something
conspicuous, if you use very large
fonts, or bold letters, then you are going to be
protected from liability. And what we suggest in
this restatement project is that this is all for not,
because it just gives sellers a way out, a protection
against liability, but without really
informing consumers. Because it doesn’t matter how
big the font is going to be, whether it’s going to be
in all caps or in bold. Consumers are not
going to read it. Now, having said that, there
could be other situations where sellers are,
in fact, induced by the salience type
methodology to actually make things salient. We think that actually
that could be a good thing. So the idea is if
sellers have a term that seems on its face
one sided or unfair, but it’s really important
for the sellers business– maybe it will allow the
sellers to charge a lower price for consumers– and
they want to make sure that this term is
in fact enforced, then they can do that by
making the terms salient. Now again, what we say
is that you can’t just make it salient by using
a certain type of font and making it all caps. What we show– and
this is the test, and this goes back to
your larger question, but on the kind of
private seller side– is that you actually
need to prove to a court through a type of
survey methodology that, in fact, many consumers
were affected by this term. They were aware of it and it
influenced their decisions. And these are things
that courts actually do. It’s not something
that is a very kind of crazy type of suggestion. So in trademark
law, for example, courts use these
services all the time to figure out what is
misleading or not misleading. Courts can use this
and sellers can provide this type of evidence as well. Going to the other part of Dean
Minow’s question, when we’re talking about
regulators themselves, should we require
this type of analysis as part of say cost
benefit analysis or another type of
administrative law requirements? You know, I think
the answer is yes. I’m not sure. You would know better than
I how we should do that as a matter of law
or doctrine, but this is definitely
something that we see regulators doing much more of. So if we’re thinking about
regulators like the Consumer Financial Protection Bureau, or
the Federal Trade Commission, they have groups of economists,
behavioral economists, and they engage in these
surveys and these studies. And they’re doing
this more and more to figure out what works,
what does not work, what actually affects consumers’
behavior and what does not. And I think this is a wonderful
and exciting development. Yes? AUDIENCE: Thanks, Oren. So normally I’m a strong
believer in regulation, but one thing that
I’m puzzled about, and that goes back to your
startup-inspired student, what is a role the private market
here on the consumer side? So in offering these services
of comparison, at least in the cell phone
business, there used to be these companies
that would tell them how you are most likely
to use your cell phone, and they would tell you what the
best plan is for your purposes, or people who would do
the hard work for you and tell you among
these carriers, note these and these variations. So they’re going to be a
problem when it’s industry-wide, for instance the United story,
when all the airlines have the same or similar policies. But to the extent you can
invite or encourage variations through the private market
and people making marketing recommendations, why
does that not operate or not operate as well? OREN BAR-GILL: It does operate. As I’ve said in other places,
and as Martha mentioned in her comments, I do believe
that the market in many cases can do a lot in order to
alleviate these problems. We think that
consumers can learn. We think that sellers often
advertise in a way to try to correct consumer mistakes. I think the example
that you gave was an important and useful one,
in the fact that we can have, say intermediaries that try
to give advice to consumers on which credit card
they should choose or which cell phone
they should choose. But it’s also
important to recognize the limits of these markets. And here is one
example of the limit. So when you have, say,
these intermediaries that are supposed to give you
advice on which cell phone plan to choose, it is
very easy for them to get a catalog
just off the internet of all the different
plans that are offered by the different providers. What is more difficult for
them is to get information about how you individually are
going to use your cell phone. How much data do you
need from month to month? How many text messages
are you sending? Do you use it for voice even? I know some people
still do that. And so they use patterns
that individuals actually have– this changes from one or
the other– is information that usually, say, my current
cell phone company, whom I’ve been with for say,
three or five years, they have all the information
about my use patterns. But the intermediaries or
competitors usually do not. One suggestion would
be we need regulation to force this kind of
sharing of use information to allow the market and
intermediaries to provide better advice. Now, there might be some
purely technological solutions even without regulation
in this space. So I could imagine that
we now have smartphones with apps that can
actually monitor our usage and just on their own collect
this usage information and then connect with
the intermediaries and find the right plans for us. So I think that all of
these kind of smart devices will kind of help consumers
and empower consumers. And again, it’s
kind of an arms race between the technology
that the sellers use and the technology that
is available to consumers. AUDIENCE: I have
a tiny question, I’m dying to know the
difference between the Danes and the Dutch. Do you remember that
slide were like 4% of the Danes donate their
organs and 25% of the Dutch? OREN BAR-GILL: No,
I can tell you. AUDIENCE: But that’s for later. That’s later, I don’t
really care about that. So I have a question
about the empirical work. Do any of the studies
simultaneously– I don’t know what the right
words are, interactive studies? Really getting at the problem
of information overload, so you’re studying a consumer
confronting one choice, whereas we’re inundated. I have my phone
plan, my natural gas company, my streaming service. And so I wonder if
there is anything in the empirical work that
suggests that at some point there are too many
choices so that everything loses its salience
because there’s some tipping point of overload. OREN BAR-GILL: Yes, so,
first of all, that’s great. And this kind of
accumulation problem is kind of well-known
and well-documented. There is a distinction though
about how the accumulation problem works when we’re talking
about fine print contracts and when we’re talking about
these new types of disclosures. So it’s absolutely right. Let’s say if there was only
one fine print contract– it was only iTunes, that’s the
only thing over my lifetime that I ever need to read– I might read it. But since we need to read
tens of these every week, then we won’t read them. And this is very powerful
and important and true. The question
becomes, when we move from these types of disclosures
to the new smart disclosures, like a GMO warning
or even Schumer box, whether the accumulation
problem works or how it works. And I don’t know of good
evidence to this effect, but my intuition is that the
accumulation problem is not going to be as severe
in those contexts. For the same reason that
when we go shopping, we always look at
the price tag, and we don’t think that
there’s an accumulation problem if I’m buying shoes
and then buying tomatoes. I’m going to look at the
price in both of these cases. And I think we have
some kind of attention span for each purchase. So as long as we are within the
kind of per-purchase attention span, I think that the
accumulation problem is not going to create a lot of issues. But it really
depends on the fact that these smart disclosures
are really sufficiently kind of concise and short,
like a GMO disclosure, like a price, a one dimensional
price that consumers can really digest effectively. AUDIENCE: Hello, Professor. Considering the current complete
lack of consumer literacy when it comes to
contracts and the fact that literally no
one reads them, do you think that even
with smart disclosures it’ll be possible to
create enough knowledge about, at least material
terms, that at least an informed minority
will be created? And so what kind
of mandates do you think will be required to
reach that level of literacy? OREN BAR-GILL: So
first of all, it needs to be– just kind of
a quick word on informed minority. There is this theory in the
analysis of consumer market that suggest that even if
most people don’t read, but just a small
informed minority read, then this informed minority
would be able to kind of move the market and protect all
of the other consumers who don’t read. So this is a really
nice theory, but it assumes that there is some
kind of informed minority. So just one or two
out of a million, that’s not going
to be good enough. Sellers are just
going to ignore them. And that’s the current
situation that we have with respect to fine print. So the informed minority to
the extent that such exists, is just too small. Now, can we make it larger? Perhaps, but again, as you
suggested, only with respect to a certain subset of terms. I don’t imagine
any way in which we can make a sufficiently large
number of consumers aware of all of the terms and
conditions in the iTunes contract. It’s just impossible, and I
don’t know how it could happen. There are important core terms
that consumers need to know. And we can– through regulation,
through smart disclosure rather than stupid disclosure–
make sure that consumers are aware of these terms. And again, we need
to be very careful and empirically
test the disclosures that we have in mind to
make sure that consumers are aware of the terms
that’s important for them to be aware of. This still does not
solve the problem that there are many
other terms consumers will never be aware of. And here we do need the law. For example, through
unconscionability doctrine, to make sure that
these terms don’t go too far to the pro-seller side. AUDIENCE: Hi, I have
a question about the normative
desirability of having people understand
everything that is going to affect their decisions. I’m thinking about a case of
a proposed disclosure that was not implemented because the
context was people taking out mortgages, and the loans
that they were being offered. The interest rate was a function
of how much the loan was, but it was also the
financial advisor was getting a cut of it. And the proposal
was to disaggregate those you could see how much
was going to the adviser and how much the loan was. And when they tried
different disclosures, what they had found, if
I recall correctly, is that people were
choosing worse loans when they knew how much was
going to the adviser because they were so offended
by the idea of paying that fee that they avoided even better
loans because of the fee. So my question for you is, if
the disclosure accomplishes that, if it helps people
see how much money is going to the advisor as
opposed to the loan, is that a success of disclosure
or is that a problem if what that does is it allows people
to act on their aversion to something that maybe
they shouldn’t be averse to? OREN BAR-GILL: So there are
several levels of answer to this question. It’s a great question. So the first part
of the question is, well, if consumers really
are informed by this disclosure and now they make a
decision, and for some reason we don’t like that decision,
we think it’s a bad decision, we need to ask ourselves
why don’t we like it. So I’ve been, either
for good or for bad, indoctrinated within
this world of economics where we take people’s
preferences for granted. We respect them. And so if we think that
these consumers knew what they were getting
into, with the help of this disclosure,
they understood what really is going
on in this transaction, and therefore, they chose
loan A versus loan B, then maybe we should
respect that choice. So that is one level of answer. The other level of answer
is, perhaps, more general. And it goes to the
care that we need to take in designing
disclosure mandates. So let’s say we have good
reason not to like the decision that these consumers
are now making. This means that the disclosure
that we now put in place is not doing what
we wanted it to do. As we said, that if we
have these disclosure that are in fact effective, they
are influencing behavior. And now we see through
this type of research that they are pushing behavior
in the wrong direction, this means that
we did not design the disclosure in the way that
it should have been designed. And so we need to
be very careful. On the one hand, we now
have a more powerful tool. We have smart disclosure
rather than stupid disclosure. But when we have a
more powerful tool, we need to take care to use it
and design it appropriately. AUDIENCE: Thank you. I have a question about
the usefulness of contract law as a legal solution. It seems like that has to be,
unconscionability doctrine, for example, has to be
premised on the real threat of a lawsuit, even
if it doesn’t happen. Companies are only going to
make their contracts comply if they think there
is a threat of suit. And given mandated arbitration
clauses or collective action problems, I’m wondering how
contract law is effective. OREN BAR-GILL: That’s
a great question. So one of the main features
of consumer contracts and many claims that consumers
bring against businesses is these are often small claims. So in many of these
situations, if you’re thinking about Citibank
or United or Comcast, they can change their
behavior and their practices and their contracts
in a way that is going to harm consumers, but
harm them just by a little bit, maybe $30 worth of harm,
$100 worth of harm. Now, consumers are unlikely to
bring suit individually even in small claims court for $30. But these $30 or
$100 are multiplied by perhaps 10
million consumers who are suffering each this
small claim, this small harm. So our standard
solution to these types of problems is aggregation,
is class actions. But indeed, as you
suggested, sellers are now fighting against
these class actions. They’re putting
in their contracts these class barring
arbitration clauses. And the Supreme Court has
blessed this practice. Now, given the situation, there
are some innovative lawyers that are trying to find ways to
aggregate within arbitration. They’re just collecting a
bunch of different claims, many different claims,
just bringing them one after the other in a way that
is not as efficient as a class action, but can do some good. We have the Consumer
Financial Protection Bureau under the authority
of the Dodd-Frank Act has conducted a study, is
in a rule making process, suggesting ways to limit
the use of these pre-dispute arbitration clauses. The makeup of the Supreme
Court might one day change. But given all of these, even
with all these minor ways around a problem, I
completely acknowledge that using private actions
to protect consumers is really limited currently. And so in many of
these situations we really need to rely on
public enforcement of the law in trying to design these types
of regulatory interventions through public enforcement
in as best a way as we can. MARTHA MINOW: Next
question, anybody? AUDIENCE: Great, thank you. So that last question
was about what happened sort of
on the back end, when you actually have
a dispute at the end and whether there’s any way you
could have gotten out of it. At the beginning, and I’m
wondering about things that might be designed
at the front end. So by the time you see
the iTunes contract, you’ve already
bought the iPhone. And so it sort of suggests that
one of the reasons why people agree to these contracts is
that by the time they see them, they’ve already made
crucial decisions and they don’t have any choice. And this also applies
to all the contracts where suddenly you find they’re
unilaterally renegotiated and there’s been an
update, and then you have to agree to the next thing. So I guess I’m wondering
whether any of these solutions apply to the timing of when
consumers see contracts relative to when they’re
making the purchases that the contracts are
going to actually apply to. Because often you don’t see
them until it’s too late. OREN BAR-GILL: Right. So again, this is
a great question. Now, first let me say that
with many parts of these terms and contracts, it doesn’t matter
when we see them, before we buy or after we buy, or
first modification or second modification. We’re not going to see them
anyway, so none of this matters. Now, I’m still mentioning
this because there’s a huge debate both in the
courts and in policy circles about these pay now,
term later contracts, where you pay now, get the
terms in the box or over email or whatever later. And people are really
mad about this. And there were so
many fights when we were drafting the
section, the restatement, about these pay now,
terms later issues. And you know, I understand
where people are coming from, but it’s all second or
third order of importance because it doesn’t
really matter. Now, there are certain
terms that consumers do pay attention to, and for
these terms timing really matters. And so what we say
there– and this is the difference between terms
that are provided in advance and then terms that are provided
later through modification– there the question
of lock in is key. So if we think that
consumers are locked in, exit is difficult, then we
should be much more harshly policing what sellers can do. And so we think that the
ability to switch, to exit, is a huge type of
consumer protection, a technique that
I did not mention, but is really important. We need to guarantee
that exit is easy, and if it is not easy,
extra scrutiny of the terms. MARTHA MINOW: There’s one
more thing we need to do. This was really magnificent. You have connected both the
surface and the elevated, the disciplines, the
theory and the practice. And we’re going
to unveil a chair, and I’m going to invite you and
your family to come up and have a photo, and everyone to
come and have a reception. Please join me in thanking Oren. [APPLAUSE] OREN BAR-GILL: Finally,
I’ve been standing here. MARTHA MINOW: [INAUDIBLE]

3 thoughts on “Oren Bar-Gill: Frontiers of Consumer Law

  • whoisdaniverson Post author

    Wow, this very topic has been of interest to me for years. Who would have thought that so many others would have also given this such careful consideration. My outrage over what I consider unfair business practices have made me consider many times getting into law. Perhaps this information could contribute to the work that Elizabeth Warren is doing with the Consumer Protection Agency?

  • Rocio Huarotte Post author

    Beautifull Harvard!!

  • Samuel Becher Post author

    brilliant talk by a brilliant scholar. Thanks a lot for that.

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