Personalizing Mandatory Rules in Contract Law
We thank Oren Bar-Gill and participants in The University of Chicago Law Review Symposium on Personalized Law for their comments, and Tal Abuloff and Tom Zur for excellent research assistance.
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Mandatory rules provide people protections they might otherwise fail to secure in their contracts. Because people vary in the degree of protection they need and the cost of protection they can afford, one-size-fits-all rules are too weak for some and too strong for others. This Essay examines the case for personalized mandatory protections. With the increasing availability of information about consumers, the law may soon be able to tailor mandatory protections that vary with each individuals characteristics. We show that personalized protections increase the overall contractual surplus and prompt more people to enter into contracts. It eliminates cross-subsidies within a class of contractors, but mostly in a way that benefits the class. Separately, we examine the case for price personalization reflecting the varying protections people receive. Lastly, the analysis identifies potential distortions, pitfalls, and practical problems arising from personalized mandatory rules and prices, and discusses the fairness of this regime.
Mandatory rules in contract law are meant to protect people from bad terms. Sometimes, bad terms creep into contracts because people dont notice or understand them, or fail to predict the terms true bite. Other times, bad terms are knowingly agreed upon because people cant afford better ones. By now, it is widely accepted that, especially in transactions involving unsophisticated parties, not everything should be left to freedom of contractthat some basic protections should be nondisclaimable.1
Mandatory rules are the most effective, but also the riskiest, regulatory technique in consumer protection.2They are effective because they guarantee a minimum bundle of rights that cannot be circumvented. But they are risky because they could have unintended consequencesraise prices, shrink markets, or impose regressive cross-subsidies.3Thus, at the forefront of protective law, the question is how to design mandates that deliver the desired upside without imposing the undesired downside.
This Essay proposes a novel solution to the design of contractual mandatory rules:personalization.Instead of one-size-fits-all protective mandates, the law would tailor the protection to the personal attributes of each protected party. Similar to the method through which other services, such as insurance, education, medicine, and marketing, are personalizedthese firms use big data to tailor their product to the predicted personal needs of each clientthe service of legal protection could be personalized to correspond to the predicted protective needs of contracting parties. We argue that, if done properly, personalization could increase the benefits and reduce the unintended costs of mandatory law. Protective needs would be better addressed, and more consumers would be served.
Consider the following example.In recent years it has become popular to enact mandatory rights to withdraw from certain types of consumer contracts.4 Based on the (sometimes correct) premise that consumers may enter transactions they later regret in haste or through misjudgment, a mandatory right to withdraw grants consumers the opportunity to cancel the deal and receive their money back. Some laws provide, for example, seventy-two-hour cooling off periods;5others guarantee a longer period of time.6
But all existing mandates share one universal property: they apply uniformly. The same withdrawal period is afforded to every consumer regardless of her true need for that protection. A personalized protection regime would change that. Some consumers need longer periods to reevaluate the deal; others can do with shorter. A seventy-two-hour right to withdraw from a loan contract may be useless to the weakest of consumers, who are often the neediest and are also the recipients of the most risky and complicated loan deals. They need more time to overcome the moment-of-purchase confusion. And conversely, a two-week right to withdraw from online sales may be more than necessary for experienced internet shoppers, and surely too long for returnaholics, who purchase with the intent to withdraw.7 A uniform duration may be set at the correct average length, but it misfires in individual cases (and, as we show, forces some consumers out of the market). The protective goals of the law would be better served by personalized mandatory rules.8
This Essay develops the general theoretical case for personalized mandatory rules, focusing on consumer transactions. The basic justification is economic and has both efficiency and redistributive aspects. Personalized protections increase the contractual surplus because they correspond more accurately to the market failure they seek to repair. Strengthening the protection for those who need moreand dimming it for those who need lesswould often increase the surplus enjoyed by both groups, bringing more consumers into the market.9 Personalized protections also affect redistributive goals because they eliminate cross-subsidies occurring in equal-treatment pools. When the cross-subsidy is regressive, its elimination is fair. And while this Essay does not develop a full account of the moral implications of mandatory protections, it shows how personalization could also promote the noneconomic goals of such mandates, such as dignity and justice.10
In studying the effect of personalized mandatory law, this Essay distinguishes two dimensions of personalization: protection and price. Personalized protections could be established by law. Personalized prices, in contrast, could be set by firms to reflect the value or cost of the protection. The law determines whether such price discrimination is permitted. A fully personalized regime is one in which both the protection and the price vary across consumers. We examine the advantages of such a regime and compare it to regimes that allow personalization along only one dimension or none at all.
It is beyond the scope of this Essay to consider the manifold issues implicated by such a radical shift in the approach to mandatory rules. Many issues related to implementationwhat data could be used, how to build the personalization algorithm, how to protect peoples privacy, and more11are too important to treat casually in the limited space we have here. We nevertheless discuss several critical incentive problems: Could personalization survive arbitrage? Would it undermine incentives for self-protection and self-improvement? We show why many intuitive concerns are misguided. Personalization of mandatory consumer laws, we conclude, should be taken seriously.
The focus of this Essay is on mandatory rules in contract law aimed at protecting consumers. But the analysis offers a benchmark for studying personalization of other mandatory rules in contract law: Should the age of legal capacity to enter into contract, which is currently uniform, vary across individuals based on their maturity? Should rules of inalienabilityagain, currently uniformapply differently across people, allowing some to sell or buy assets that others may not? Should the statute of frauds be personalized? We leave such expanded inquiry for future research.
The Essay is organized as follows: PartI presents a theoretical framework to identify the effects of personalized mandatory rules and compares different possible personalization regimes. PartII discusses various incentive problems that could befall personalized law. PartIII then discusses applications of the theory, demonstrating how personalized rules would work in various contexts of protective law. Finally, the Conclusion points to possible future research.
A.Framework of Analysis
Consider a market in which each consumer may purchase one unit of a product. The value of the product depends on a feature that we refer to as legal protection. For example, the value may depend on the warranty or the right to withdraweach of which may be mandated by law to afford protection to the consumer.
A contract between the seller and a consumer consists of a protection level (mandated by the law) and a price. It is assumed that the seller is operating in a competitive environment and thus charges a price exactly equal to its costs of providing the protection.
The legal mandate may be set at No Protection, Low Protection, or High Protection levels. The mandates may be eitheruniform, which means all consumers must receive that same level of protection, orpersonalized, which means that the level of protection may vary across consumer types. Mandating a level of protection means that the seller may not offer a product withlowerprotection (but it may offer a product with higher protection).
Consumers are assumed to vary along two dimensions: thevaluethey assign to the legal protection and thecostto the seller of granting them protection.
The first variationin the value but not in the cost of the protectionoccurs when the protection is fitted into the product and the only cost is its installation. This is the case, for example, with mandates to fit a product with a safety device (mandatory airbags in a car12) or mandates to comply with minimum quality standards (warranty of habitability in lease contracts13). While consumers value the protection differently, the costs to the seller are uniform across consumers.
The second variationin costoccurs when the mandated protection is a legal right that needs to be invoked by a consumer and, thus, may be utilized differently by different consumers, imposing a cost that depends on the consumers propensity to utilize that right. This is the case, for example, with mandatory remedial provisions (a right to cancel the contract14 or to seek statutory damages15) or mandatory prohibitions (like the prohibition against collection ofpersonal data,16which imposes a cost on the seller equal to the value of the information that would otherwise be collected).
Consider the following example involving two types of consumers, labeled A and B. Assume that, in the absence of protection, both receive a net positive benefit of $1 from product usage (the value of the product to the consumer minus the price). In addition, the legal protection, which is costly for the seller to provide, has a different value and cost for each consumer:
Table1:Protection Level and Price
TypeA consumer values any level of protection more than TypeB does. But TypeA also imposes a higher cost on the seller at any level of protection. We chose an example in which the optimal personalized level of protection (marked with *) varies across consumer types: for TypeA it is No Protection, and for TypeB it is High Protection. None of our results change if the individually optimal levels lie in the midrange.
To illustrate, TypeA is a consumer who values a right to withdraw more, perhaps because she makes more rash purchases or purchases products of higher value. TypeA also imposes a greater cost on the seller by withdrawing more often or by returning the product in worse shape.
In the benchmark analysis, we focus on the criterion of maximizing the value of the contract. Under a constraint ofuniform protectionacross consumers, the optimal level is Low Protection (assuming equal numbers of TypeA and TypeB consumers). It provides a total surplus of $2, which is greater than $0 for No Protection or$2 for High Protection. The example was constructed to illustrate this common scenario: the optimal level of protection for each consumer may vary along a range, while the optimal uniform protection is somewhere in the middle.17 It is only when such variation exists that personalization of the protection is relevant.
To examine consumers welfare, we assume that sellers operate in competitive markets and thus the price exactly reflects the cost of protection. Further, we focus the analysis in this Part (unless noted otherwise) on the behavior of consumers who know what level of protection they receive and correctly anticipate its value. It is tempting to think that such knowledge by consumers defies the reasons for mandating the protectioninformed consumers can demand it on their own. But mandates exist even when consumers appreciate their value. For example, a protection might be granted to all consumers because some are uninformed. In such cases, informed consumers piggyback on the protective mandate.18 Once a mandatory protection is granted, informed consumers could not be treated separately.
B.Personalized versus Uniform Law
In this Section, we examine consumer welfare under four possible legal regimes created by a pair of binary legal choices. The first legal choice is whether to mandate a uniform or a personalized protection. The second legal choice is whether to allow personalized prices (reflecting the cost of the personalized protections) or to require uniform prices. Thus, the four regimes are:
1. Uniform Protection and Uniform Price
2. Uniform Protection and Personalized Price
3. Personalized Protection and Uniform Price
4. Personalized Protection and Personalized Price
1.Uniform Protection, Uniform Price.
Consider a legal mandate to provide the socially optimal uniform level of protection, which in the example is Low Protection, along with a prohibition against price discrimination. For the seller, the cost to provide this protection is $10 for TypeA and $2 for TypeB, on average $6. At this price for the protection, both TypeA and TypeB will purchase the product (As value for the protection is $8, Bs value is $6, and both receive a benefit of $1 from usage independent of the protection).
Several key effects of Regime1 are illustrated by this scenario:
First, TypeA consumer is cross-subsidized by TypeB (this is true regardless of whether consumers are informed or not). This cross-subsidy is a common artifact of uniform protective laws with uniform prices: those who value the protection more are gaining at the expense of those who value it less.19There are important distributive implications to such cross-subsidies, and they would be particularly disturbing if the direction of the transfer is regressive.20 In addition, due to the cross-subsidy, inefficient purchase decisions might be made (here we refer primarily to informed consumers). In particular, TypeAs consumption is inefficient: left to pay for the true cost that it imposes on a seller providing Low Protection ($10), TypeA would decline the transaction because the value from the transaction is only $9 ($8 from the protection plus $1 from usage). But because some of the cost is now borne by the TypeB consumer, TypeA consumer would happily take the windfall. Note that, in this example with No Protection, TypeA consumer would buy the product (usage benefit of $1), so her decision to buy, even with a cross-subsidy, turns out to be efficient. But this is not always so. If the usage benefit of the deal for TypeA consumer (with No Protection) were negative, say$1, she would not enter into it without the cross-subsidy.
Second, TypeBs consumption may also be inefficient. In the example, the price charged by the seller for the protection is equal to TypeBs value for the protection, which leaves the TypeB consumer with a benefit of $1 from the transaction. But the example can easily be expanded to a scenario in which the price for the protection exceeds that value by more than $1. Then, the cost of the protectionin particular, the cross-subsidy implicit in the pricewould be crushing to TypeB consumer, who would inefficiently exit the market. This unraveling is particularly unfortunate because, with No Protection, TypeB would make the deal for a positive welfare of $1. Moreover, if TypeB exits, the seller could no longer afford to charge a price reflecting the average cost across A and B. With only TypeA in the market, the seller would have to raise the price to reflect the cost of providing Low Protection to TypeA. At that price, TypeA consumers will also exit the market (they pay $10 for the protection but receive a benefit of $8 from the protection and $1 from usage).
These effects are shown under the assumption that the legal mandate is set at the socially optimal uniform level of protection. The law could instead set the uniform protection at a different level, focusing perhaps on the interests of one type of consumer. That might, depending on the values, increase welfare and avoid some of the unraveling. But the flavor of the results above remains, and it is an artifact of a regime that treats different types of consumers uniformly.
In general, the direction of the effects the numerical example illustrates are typical of a Uniform Protection, Uniform Price regime: many consumers receive an inefficient level of protection, which reduces their overall surplus from the transaction andhaving to pay for inefficient protectionreduces their propensity to enter into the contract. Some of those consumers would have preferred to waive some of the protection; others want to pay for more protection. At the same time, there are consumers who are cross-subsidized under the Uniform Protection, Uniform Price regime; their surplus from the deal, as well as their propensity to enter into contracts, inefficiently increase. As a result, some unraveling is likely.
2.Uniform Protection, Personalized Price.
Consider now a legal mandate to provide the socially optimal uniform level of protection, which in the numerical example is Low Protection, but allowing the seller to price discriminate. The seller would charge each consumer a price reflecting the sellers cost of providing that protection, $10 for TypeA and $2 for TypeB. Only TypeB would purchase the product.
In fact, a uniform protection regime with personalized prices could potentially yield greater welfare if the mandated protection is different than the optimal uniform level. If, in the example, the uniform mandate were High Protection, again the TypeA consumer would avoid the transaction entirely because she values the protection at $12 and yet is asked to pay $20. But now, the net welfare to the remaining consumer, TypeB, would increase to $6. Thus, a uniform protection regime that anticipates the unraveling should set the level of protection that is optimalfor those consumers who remain in the market.
Several key effects of Regime2 are illustrated by this scenario. First, while there is no longer any cross-subsidy, a uniform level of protection could push some consumers out of the marketthose who prefer not to bear the cost of the protection. Second, this regime imposes a loss on some consumers who receive a positive net payoff and remain in the marketbut who are saddled with a protection level that is different than their personally optimal one.
3.Personalized Protection, Uniform Price.
We now turn to examine personalized mandatory protection. Consider first a legal mandate to provide each consumer her personally optimal level of protection but prohibiting variation in prices. Assume that the personalized mandates are set at the efficient level: No Protection for TypeA and High Protection for TypeB.
Having to charge a uniform price (and assuming, still, equal numbers of TypeA and TypeB consumers in the market), the seller would like to charge a price of $2 for the protection (an average of $0 and $4, the cost of such protections). At this price, however, the TypeA consumer would not enter the transaction because the value of No Protection is $0, and her usage benefit is only $1. With TypeA out, the seller would have to charge a price of $4 for the protection. The pooling of price causes an inefficiency in the form of partial unraveling, whereby TypeA consumers do not enter these transactions and forgo the $1 usage benefit.
In some settings, the degree of unraveling can be reduced by adjusting the personalized protection. If, in the example, the personalized protection for TypeB were set at Low Protection (lower than the socially optimal personalized level), the uniform price of the protection would be reduced to $1 (average of $0 and $2), and TypeA would not exit the market. In the original numerical example, such adjustment reduces overall welfare, but in other cases welfare might increase.
In general, the uniform price mandate distorts the market outcome. The cross-subsidy it embodies reduces the propensity of some consumers to enter the contract. They will enter the transaction less often than optimal. At the same time, it increases the propensity of others to enter and might lead to excessive and inefficient contracting. This distortion can be reduced by shifting away from the socially optimal personalized protection for some consumers, but such deviation produces a new form of loss.
4.Personalized Protection, Personalized Price.
Finally, consider a fully personalized law: a legal mandate that provides each consumer her personally optimal level of protection and allows the seller to charge each consumer a different price. In our example, TypeA consumer receives No Protection and pays $0 for it. TypeB consumer receives High Protection and pays $4 for it. Each type enjoys a positive payoff (which, by construction of the regime, is the maximal payoff they can attain in the market). The result is maximization of the consumer surplus. This is the result that would occur with no legal mandate in a well-functioning market (informed consumers, perfect competition, and segmentation of consumers): each consumer would receive the individually optimal quality. There is no cross-subsidy, and thus the incentive to contract is optimal.
The previous Part demonstrated that personalized contractual protections and prices can increase the total value of the contracts. Some consumers might lose from personalizationthose who receive a cross-subsidy under a uniform regimebut the gain to others generally exceeds such loss. More consumers enter contracts and enjoy well-matched protections, and overall welfare increases. This is not surprising: one-size-fits-all treatments usually squander the advantages of tailored treatments, and we have shown that uniform prices cause unraveling.21
It is common and uncontroversial for sellers to personalize many product features, such as storage capacity of smartphones or amenities in a hotel. It is also common and uncontroversial to then personalize the prices of products containing varying features. These practices of personalized features with corresponding prices also extend to voluntary protections offered by sellers, such as extended warranties by stores or expanded rights to withdraw from transactions by airlines.22 At the same time, it is currently widely uncommon for the mandatory legal features to be personalized in terms of scope and price.
The question we pose is: Why? What might explain the wide embrace of some types of personalization (features and voluntary protections) and not others (mandatory protections)? In this Part, we examine several possible objections to personalized mandatory protections and prices.
If different consumers receive different protections or prices, arbitrage may take place: consumers of one type will buy in order to resell to consumers of another type. Those who get higher prices, or less protection, or a worse combination of the two, would purchase not from sellers but from other consumers who receive better terms.
Arbitrage might occur under Regime2 (Uniform Protection, Personalized Price)because TypeA consumer, who is charged a higher price for the same protection, would buy instead from TypeB and get the legal protection at a lower price. It might occur under Regime3(Personalized Protection, Uniform Price)because the TypeA consumer, who is charged the same price for less protection, would again buy from TypeB and get more protection for the same price. And arbitrage might occur under Regime4 (Personalized Protection, Personalized Price)because the TypeA consumer would prefer the combination of price and protection that TypeB receives and, again, buy through TypeB. Under Regime1 (Uniform Protection, Uniform Price),arbitrage is not an issue because all consumers receive the same deal.
Thus, arbitrage may undermine personalization unless the law finds ways to prevent it. Arbitrage could be prevented if the personalized protection is attached not to the product (in rem) but exclusively to the consumer who purchased it (in personam). For example, if a consumer purchases a computer and has an extensive personalized right to withdraw, then to avoid arbitrage, a seller may require that the original purchaser must be present to withdraw (that, too, can be circumvented); or, more effectively, the seller might sell computers that require personalized access codes or other forms of identity verification.23In general, by structuring the transaction not as a one-off sale of a discrete good but as an ongoing service of access to the product, sellers may eliminate arbitrage.24 Techniques currently used to prevent resale of licensed digital products, including contractual prohibitions against such transfers, would also be effective in stopping arbitrage.25
Consider now how the different legal regimes affect the behavior of consumers in the transactions and, specifically, their decisions to utilize the protection. We consider both static and dynamic effects. At the static level, a legal protection is a form of safety cushion, which could create a standard moral hazard problem: when consumers dont bear the cost imposed on sellers, they overuse the protection. At the dynamic level, consumers behavior may be affected by the desire to impact future prices and protection levels. (Think of an insurance policyholder who exercises more care so as to avoid a loss that, while fully covered by the insurance policy, would increase her future insurance premiums).
Under Regime1 (Uniform Protection, Uniform Price), the standard static moral hazard problem of overutilization arises: the consumer externalizes the costs of the protection to the seller and uses the protection too often. A consumer who receives, for example, a right to withdraw would not be careful enough in her purchases; and any time she can get even a minor benefit from withdrawing, she would not think twice before doing so. There is no dynamic effect that would otherwise offset such overuse because the terms the consumer will receive in the future do not depend on the overuse.26
A behavioral distortion might arise under Regime3 (Personalized Protection, Uniform Price). Again, the static problem of moral hazard occurs because the consumer has nothing to lose by overutilization of the protectionthe price does not adjust. But now there is also a dynamic effect, and it could either aggravate or mitigate the static overuse problem. If high utilization leads to adjustment of the personalized protection level upward, the consumer would have an even greater incentive to overuse. But high utilization also increases sellers costs, and that could lead the law to set a lower, rather than higher, level of protection. In such cases, the dynamic effect would restrain a consumers static incentives to overuse the protection.
Importantly, the data that can be inferred from observed behavior about consumers valuations is biased: it reflects the distortions created by the legal regime rather than true inherent values, and a personalization algorithm has to be trained to discount such information in calculating optimal personalized levels of protection. We view this as an additional cost of uniform price regimes: producing unreliable information that reflects distorted behavior.
Under Regimes 2 and 4, which involve personalized prices, no static moral hazard arises because of the dynamic effects of personalization. In particular, the consumer knows that her actual behavior would affect the price she would pay in future transactions, and this would restrain her incentives to overutilize the protection. And as long as the price accurately reflects the cost imposed on the seller, the consumer would behave optimally. Still, Regime4 is superior to Regime2 because the Personalized Protection, Personalized Price regime gives the consumer the dynamic incentive to use the protection in a way that would adjust the protection toward her personally optimal level.
This discussion suggests that full personalization is desirable for prompting not only optimal protection from sellers but also good behavior by consumers. This should not be a surprise. Moral hazard problems are generally mitigated by long-term payoff structures that punish agents for poor behavior.27 Still, this analysis has important ramifications for personalized regimes: their design shouldnotbe based mainly on consumers past behavior under a different regime. If the law were to transition, for example, from Regime1 to Regime4, consumers past behavior should not be a crucial factor in setting the personalized levels.
The behavior of sellers is also shaped by the prevailing legal regime. Sellers can engage in various ex ante expenditures to reduce the cost of complying with the mandated protection (other than avoiding the deal altogether). They may target some populations over others28or design transactions to reduce the cost of the mandated protections.29 When consumers tend to overutilize the protection (as we argue would happen under the uniform price Regime1 and sometimes also under Regime3), the seller would have added incentives to reduce that cost. To illustrate, if consumers overuse a right to withdraw, the seller would engage in broader disclosure or engage in less remote selling to reduce the buyers rate of withdrawal. While the same concern drives the seller under Regime4, it is attenuated: the buyer is disciplined by the personalized prices.
C.Ex Ante Incentives
Consider now a different ex ante aspectthe incentives of consumers to reduce their need for the legal protection.30Here we consider not the transaction-specific incentive to deploy the protection but the underlying decisions of consumers to alter their typeto invest in various skills that would reduce their need for legal protections. To illustrate, if legal protection is granted to consumers because they are ill-informed, uninsured, or poor, consumers might invest less in information, insurance, or work.
Regime1 (Uniform Protection, Uniform Price) creates no additional incentives for consumers to improve their skills, beyond their basic interest in less need for a legal protection. Regime2 (Uniform Protection, Personalized Price) provides stronger incentives: a consumer with improved skills requires less protection, which is less costly to the seller and leads to a lower price.
A strong intuition might suggest that personalization of the protection without personalization of prices (Regime3) woulddistortincentives for self-improvement. If, as a result of making a costly investment in improved skill, a consumer values the legal protection less and receives less of it, the consumer would invest less.31But the reverse could also be true. Better skills may sometimes reduce the cost to the seller, which would justify a higher, rather than lower, level of protection.32 In such cases, buyers would have stronger incentives to improve their skills.
What about sellers incentives to reduce their costs under Regime3? If a seller that invests in reducing its costs of granting the protection is then required to provide higher personalized protection, the seller would invest less. A seller, for example, might be able to invest in technologies that would ensure an effective reuse of returned products that otherwise get thrown out. But if such investment results in an increase in an extended period of withdrawal, the seller would be less likely to invest.33
This concern with the deep ex ante effects of personalized law is valid and important, and we have examined it in depth elsewhere.34 In general, when the law attaches greater protection or grants other benefits to low-skilled individuals, it reduces their incentives to improve. If a doctor who improves her skills is then confronted with higher personalized standards of care (with no increase in the prices she can charge), she would invest less than if no such personalization of liability occurs.35
But this concern is of lesser bite in the context of consumer contracts if the personalized protection is also matched with personalized prices (Regime4). Now, improved skill could benefit a consumer. If she receives lower personalized protection, she is also charged a correspondingly lower personalized price. If the entire value of her increased skill is internalized to the consumer through the lower pricenamely, if the sellers operate in a competitive environmenther investment, as well as the incentivesof the seller to reduce the costs of the protection, would be optimal.
One-size-fits-all rules in contract law are formally equal but in fact redistributive. If all consumers get the same right at the same price, those whose protections are more costly for the seller are cross-subsidized by others. The question then is whether the distributive effects are the intended ones (usually the goal is to favor most those who can afford the protections least) and, therefore, whether the effects are desirable from a social perspective. Because many consumer protections are intended to improve the well-being of the weakest consumers, it is crucial to verify that they do not unexpectedly have the opposite effect.
Under Regime1 (Uniform Protection, Uniform Price) in our example, the winner is TypeA consumer and the loser is TypeB: the latter pays a price above the sellers cost to subsidize the former. If the social goal were to maximize contractual surplus, TypeA should not get the protection in the first placethe cost outweighs the benefit. But if the social goal accounts for distribution, is the cross-subsidy desirable? TypeA consumers value the protection most and also cost the seller more. Perhaps this is so because they are less sophisticated and less educated, more prone to make regrettable contracting errors than TypeB. They are in greater need for a protection that digs them out from their own mistakes and misfortune. With no protection, TypeA consumers would get deals with low surplus (they will not be able to afford high protection) or refrain from entering the deal. The mandate with cross-subsidy helps these consumers at the expense of the more advantaged TypeB. Of course, it runs the risk of unravelingTypeB consumers leaving the marketbut as long as TypeB consumers have high enough value from the deal, such progressive cross-subsidies can be sustained under Regime1. It is possible, of course, that TypeA consumers are the relatively more sophisticated. They know how to deploy the protections better; thus they value the protections more and also cost the seller more. In such a case, the cross-subsidy under Regime1 is unjust.
Lets turn now to Regime3 (Personalized Protection, Uniform Price). In this regime, all consumers pay the same price but some are more protected than others. Now, the cross-subsidy reverses: TypeA consumers subsidize TypeB consumers. The former get no protection (because this is the optimal level given the high cost of providing them protection) but pay the same price for protection as part of this protection regime. If, for the reason above, TypeA are a disadvantaged group, the distributive effects of Regime3 are regressive and hard to justify. In other words, in situations in which disadvantaged groups value the protection more but also cause it to be disproportionately costly, personalized protection without personalized prices may backfire. Of course, the situation could be different: if the optimal personalized protection of the disadvantaged consumers is at a higher level than the one granted to the other consumers, and all pay the same uniform priceas might be the case in many occasionsthe distributional effects of Regime3 would be progressive.
What about Regime2 (Uniform Protection, Personalized Price)?In this regime, all consumers receive the same protection but pay different prices, based on the sellers expected costs from the utilization of the protection by each consumer. As we explained, some consumers get less protection than what they need, and others get more than what they need, but there is no cross-subsidization. The same is also true about Regime4 (Personalized Protection, Personalized Price): no cross-subsidies and, therefore, no redistributive effects.
We conclude, therefore, that personalization could, at times, defy the progressive goals that underlie the protective mandate. If weak consumers are the recipients of a cross-subsidy under a uniform price regime, they could lose it if prices are personalized and might even be priced out. The culprit for this problem is the personalization ofprices. As long as prices are uniform, the personalization of the protection itself does not necessarily hurt the weakest consumers. On the contrary, if weak consumers are the recipients of higher than average personalized protection, the cross-subsidy embodied in a uniform price would be bolstered.
PartsI and II examined the theoretical case for personalized mandatory protections in consumer contracts. We now examine several prominent applications of this approach. There are numerous mandatory commands governing consumer contracts, most of them sector-specific and all potentially subject to personalization. Some mandates are stated as one-size-fits-all, bright-line rulesfor example, the rule prohibiting insurers from contesting a policy after it has been in force for two years.36Other mandates are standards that receive more flexible, case-specific application but are never fully personalizedfor example, the doctrine of unconscionability in contract law.
The goal in this Part is to provide additional insight into theimplementationof personalized protections.37 We therefore divide the discussion into three Sections. The first two discuss the primary market failures that justify mandatory protections: consumers misinformation and irrationality. We argue that mandates justified by such imperfections are ripe for personalization because the magnitude of these problems varies greatly across consumers. Accordingly, each of the first two Sections provides prominent examples of mandates that respond to these two market failures and demonstrates how to personalize them. The third Section shifts focus to mandatory protections justified by moral, noneconomic concerns. We ask whether personalization could enhance, rather than frustrate, the moral concerns used to justify the protections.
A.Mandatory Protections Based on Asymmetric Information
One of the primary justifications for mandating consumer protections is the concern that consumers do not have the necessary information to demand such protections voluntarily. It is widely documented that consumers have different degrees of imperfect information and, thus, different needs for the corrective mandates that address such deficiencies.38It should not be a radical move, then, to vary the mandate according to the gravity of the problem it seeks to solve.
The most straightforward illustration of this protection is personalized mandated disclosure.39 Consumers are protected through disclosure mandates if the information provided improves their decisions. Setting aside the questionable empirical basis of this premise,40 disclosure mandates should vary based on how much consumers need, or can use, the information. The regressive cross-subsidy effects arising from uniform disclosure mandates have been demonstrated in many consumer protection areas41and could be lessened by personalized mandates.
Another protective mandate grounded in the problem of asymmetric information is mandatory seller liability. Consumers may fail to appreciate the value of such protection and neglect to purchase it on the market. This could justify mandated warranties, sometimes provided by lemon laws, which provide a refund remedy when the goods are chronically defective,42or by mandatory liability for bodily injuries.43 Some consumers do not have the information necessary to appreciate the value of the sellers liability andif left to bargain for itwould buy too infrequently and too little. While such failures may also result from cognitive misjudgment, they are primarily a problem of misinformationsellers have an incentive to blur the true need for liability. (Note that problems of misjudgment could cause people to be overly pessimistic and purchasetoo much, rather thantoo little,liability.44)
The misinformation problem leading consumers to undervalue the sellers liability afflicts consumers differently. A consumer who adequately anticipates the problems that warranties seek to address can be relieved from (at least some of) the mandatory nature of the sellers liability. No one is born with the knowledge of how to value a warranty, but people learn their needsonly they do so at different rates, based on their varied experience, education, risk aversion, and access to other forms of insurance.45And consumers vary not only with respect to the gravity of their misinformation but also what the missing information implies.46For example, two consumers may be equally and entirely inexperienced and uninformed, but one of them direly needs a warranty because the consequences of an uncovered loss would be devastating to her, whereas the other might not. Personal factors could help define each consumers need for, and scope of, mandatory seller liability.
As discussed in PartI, tailoring personalized liability would have obvious advantages. First, consumers will get the personally optimal, rather than the average, coverage. Second, if coupled with personalized prices, cross-subsidies would be eliminated and consumption would be more efficient (recognizing, however, that cross-subsidization, if progressive, could lead to more contracts). Third, in cases in which the sellers liability relates to bodily injuries or other consequential losses, as a matter of distributive justice, a regressive cross-subsidy embodied in Regime1 (Uniform Protection, Uniform Price) would be eliminated. This is because a uniform protection regime provides morevaluable coverage to high-income consumers: they have higher losses compared to lower income consumers. (Most notably, their expected damages would be higher because their lost income in case of bodily injury is higher.) And if all consumers are paying the same price, the high-income, high-protection group is undercharged.47 Personalizing sellers liability would reduce this regressive effect.48
B.Mandatory Rules Based on Consumers Irrationality
Mandatory protections are often based on consumers lapses of judgmentmistakes they make that are not due to imperfect information. Consumers are said to fall prey to marketing techniques that highlight seductive aspects of the transaction (for example, teaser rates on credit cards).49 Or they are prompted by scare tactics and overworry about losses (and then purchase expensive and unnecessary insurance).50 Or they get stuck in habits and preset defaults, failing to make a minimal rational effort to change the status quo and enroll, for example, in programs that provide a net benefit.51
These afflictions have been widely invoked to justify the design ofdefault rules.52The thinking is that consumers could be dug out of their cognitive fallacies by changing the defaults. We think that this idea is naïve, with a long history of failure.53 Default rules are a miserably poor method to protect consumers who make bad judgments because they are too easy for sellers to reverse. Consumers who do not seek the protections on their own are not likely to object to prompts by sellers urging them to disclaim the default protections. The handful of examples for successful sticky defaults that protect consumers are the exceptions. Taking consumers irrationality seriously should be the basis for designing smart and personalized mandatorynot defaultprotections.
Consider, for example, mandated limits on credit card teaser rates.54Creditors lure consumers with low short-term prices only to raise them drastically in the long-term. There is evidence that these arrangements take advantage of consumers cognitive failures. Creditors correctly expect that borrowers would give disproportionate attention to short-term salient discounts, ultimately getting these borrowers to pay too much down the road for credit.55 The intervention for this market failure must be mandatory, or else creditors will easily get consumers to disclaim it. The Credit Card Accountability, Responsibility, and Disclosure Act of 200956 (CARD Act) accordingly prohibited some forms of behavioral pricing and teaser rates57but in a one-size-fits-all manner. This sweeps away the possible benefits some consumers get from short-term discounts. Teaser rates might serve legitimate purposes: sellers might want consumers to acquire experience with a new product, and low prices for a short period might serve both parties interests.
Personalized protection could do better. For one, sophisticated consumers should be allowed to enjoy teaser rates because they are careful enough to avoid the back-end high rates (by switching to a different card). Why deny them the flexibility to take advantage of these loss leaders? Among less sophisticated consumers, the protection is needed but not uniformly. The one-year freeze required by the law58 may be sufficient for some but too low for others. There is ample evidence that finances, charges, and fees charged to borrowers vary greatly across income level and credit score, providing both a justification and a yardstick for personalized limits.59
This example is drawn from the area of consumer credit, in which many protections are justified by various types of irrationality. It is also an area ripe for using big data to personalize the legal protections. In fact, personalization is already occurring in the shadow of the law. Credit reporting agencies collect mountains of data on consumers finances, making it available to creditors to personalize their services. Why should the attributes of the product that are designed by the law be left out of this rich reservoir of information?60
C.Morally Motivated Mandatory Rules
Mandatory protections often find their justification not in market failures relating to information or rationality but, instead, in moral convictions that society holds. Those protections often manifest as prohibitions on selling some entitlements people have. Thus, people cannot sell their organs61 or their right not to be exposed to highly life-threatening conditions.62 Inalienability, in other words, is a type of mandatory protection afforded to all, justified on grounds of dignity, justice, and sometimes efficiency.63
In consumer contracts, some rights are likewise thought to be fundamental. Even if a fully informed and rational consumer would agree to be treated harshly, societal values may deny effect to such consent. People may not waive, for example, the mandatory warranty of habitability in rental contracts64despite the real possibility that such minimum guarantees of dignified living may drive up prices and drive out the poorest tenants.65 Likewise, workers may not agreeeven after full and meaningful deliberationto accept less than minimum wage for their labor.
Could such mandates be personalized? This question sounds almost heretical. The essence of such protections is to guarantee everyone in society a minimum basic set of rights. Wouldnt this objective be undermined by personalized protection? True, if personalization involves reducing the protection for some consumers below the minimum tolerable level that comports with societal moral values, the answer would categorically be no.
But what about upward personalization? Why notincreasethe protection for some above the minimum tolerable level? A basic warranty of habitability ought to be provided for all, but a heightened one could also be tailored based on circumstances. Moreover, the guarantee of minimum fair terms is at times controversial because of its unintended effects. Possibly, some tenants lose access to homes when a warranty of habitability is enforced,66 some workers lose jobs when workplace mandates are put in place,67 and some borrowers lose access to credit when loan agreements are subject to mandates (like usury prohibitions or limitations of creditor levy).68 Personalized protections could work to strike a more delicate balance between the protective goals and their unintended effects. Some consumers would receive less protection if the cost of such protection would crush a sellers ability to cater to them. We recognize that such tailoring would have to compromise some of the goals underlying prevailing moral convictions for consumer protections and, thus, should be implemented only when the compromise carries proven benefits.
But personalization could be even more ambitious and work not only on the side of thebenefits. Interestingly, personalization might also work on the side of thecostsof such relaxation. Some of the moral arguments that justify the protection differ significantly in their strength from one type of consumers to another.69 Reconsider again the warranty of habitability. Imagine a young, healthy law student who can easily afford to live in a decent apartment but prefers to live in a subpar low-rent apartment so as to save money for a tour in Europe after graduation. While the benefits of relaxing the protection are not huge (unless one considers traveling to Europe to be an essential necessity), the moral costs of such relaxation are minor. A mandatory right to habitability can be personalizedand in this case reducedespecially if the tenant is granted instead a right to revoke the tenancy at any time with no penalty.70
We recognize that too many aspects too important to ignore were left undiscussed. In a way, we wrote only the first half of the article we have in mindthe optimistic half. The second, unwritten portion would have to grind through the numerous difficulties of personalized mandatory rules. For example, we said nothing about technical implementationan enterprise that would require much more than writing computer code. Deep and troubling questions would have to be resolved in developing a personalization algorithm: how to define the algorithms objective, how to avoid prohibited discrimination, and how to get the necessary data.71
We end with two final remarksabout the inevitable and the unwarranted. First, we think that some personalization of mandatory rules in contract law is inevitable. If the law does not personalize the rights, firms will. Return to the introductory example of a consumer right to withdraw. Already, even without legal mandates, most vendors provide such rights to consumers. Amazon gives thirty days to return products, Walmart gives ninety days, and airlines sell rights to withdraw at a premium.72 For now, these are uniform attributes each firm grants to all its customers (other than the blacklisted returnaholics). But firms are using their large databases to personalize various aspects of the transactionshow long before they begin to offer consumers personalized rights to withdraw based on individual demand, vendor cost, or loyalty incentives?73 Personalization by firms is done to increase profits, not consumer welfare. Law-driven personalization can do better in those cases in which market forces cannot be trusted to protect consumers.
Last, we think that some personalization of mandatory rules is unwarranted. It might be tempting to read this Essay as a proposal for personalizing all mandatory laws, including constitutional rights, criminal prohibitions, or procedural guarantees. This is not the conclusion our analysis supports. The case for personalizing mandatory rules in contract law is based on the premise that contractual protections respond to real difficulties people encounterin different magnitudesin crafting their transactions. Personalizing the protective rules is a way to treat each individual according to her actual needs. Because contracts are a creation of private will, personalized legal intervention does not violate their foundation. If a case for personalizing public law rights is to be made, it will have to be based on a different foundation.
- 1. See Oren Bar-Gill,Seduction by Contract: Law, Economics, and Psychology in Consumer Markets2644 (Oxford 2012).
- 2. See Oren Bar-Gill and Omri Ben-Shahar,Regulatory Techniques in Consumer Protection: A Critique of European Consumer Contract Law, 50 Common Mkt L Rev 109, 11115 (2013) (discussing the problems with mandatory proconsumer arrangements).
- 3. SeeAriel Porat and Lior Jacob Strahilevitz,Personalizing Default Rules and Disclosure with Big Data, 112 Mich L Rev 1417, 145354 (2014)(discussing the effects of personalization when consumer rights are default rules); Omri Ben-Shahar and Eric A. Posner,The Right to Withdraw in Contract Law, 40 J Legal Stud 115, 12728, 14445 (2011) (suggesting that a mandatory return policy could potentially lead to cross-subsidies among consumers).
- 4. See Jan M. Smits,Rethinking the Usefulness of Mandatory Rights of Withdrawal in Consumer Contract Law: The Right to Change Your Mind?, 29 Penn St Intl L Rev 671, 671 (2011) (Both in Europe and the United States, withdrawal rights are increasingly part of mandatory legislation to protect consumers.); Shirly Levy,The Illusory Promise of Money Back Guarantees: Comparative Research, Economic and Behavioral Analysis & A Reform Proposal*1516 (unpublished PhD dissertation, Tel-Aviv University, Nov 2015) (on file with authors) (describing US and European laws on this matter).See also Directive 2011/83 of the European Parliament and of the Council of 25 October 2011 on Consumer Rights, 2011 OJ L64,§19(Nov 11, 2011)([T]he consumer should have a right of withdrawal unless he has consented to the beginning of the performance of the contract during the withdrawal period and has acknowledged that he will consequently lose the right to withdraw from the contract.).
- 5. See, for example, Federal Trade Commission, Rule concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations, 16 CFR§429.1(a) (2015) (requiring that a buyer who is engaged in a door-to-door sale have a right to cancel the sales contract within three business days of the transaction).
- 6. See, for example, the Canadian Consumer Protection Act: CPA Direct Agreements Rule,§43(1) (2002) (granting a ten-day cooling-off period on door-to-door sales).
- 7. See Kristin Colella,Returnaholics, Beware: You Could Get Blacklisted by Your Favorite Stores(The Street, Mar 16, 2015), archived at http://perma.cc/T4YW-3F4Q.
- 8. See Porat and Strahilevitz, 112 Mich L Rev at 145354 (cited in note 3) (discussing personalization of a default rule for the right to withdraw).
- 9. We also consider the possibility that those who need the protection more impose such high costs on sellers that they should receive a low level of protection.Seethe numerical exampleinPartI.
- 10. SeePartIII.C.
- 11. Some of these issues were previously discussed in Porat and Strahilevitz, 112 Mich L Rev at 143353 (cited in note 3); Omri Ben-Shahar and Ariel Porat,Personalizing Negligence Law, 91 NYU L Rev 627, 67686 (2016); Anthony J. Casey and Anthony Niblett,The Death of Rules and Standards, 92 Ind L J 1401, 142345 (2017). Other issues are raised in other contributions to this Symposium. See generally, for example, Niva Elkin-Koren and Michal S. Gal,The Chilling Effect of Governance-by-Data on Data Markets, 86 U Chi L Rev 401 (2019).
- 12. See, for example, 49 USC §30127(h) (stating that government cars must be equipped with inflatable restraints).
- 13. See, for example,Fla Stat Ann §83.51 (requiring landlords to comply with statutory minimum standards).
- 14. See Ben-Shahar and Posner, 40 J Legal Stud at 11821 (cited innote 3).
- 15. See, for example,17 USC §504(c)(1) (allowing copyright owners to elect statutory damages in a sum of not less than $750 or more than $30,000 as the court considers just).
- 16. See, for example,Fla Stat Ann §540.08 (prohibiting unauthorized publication of a persons name, portrait, photograph, or other likeness for any commercial or advertising purpose); Ky Rev Stat Ann §391.170 (protecting property rights in a persons name or likeness from commercial exploitation).
- 17. The optimal uniform protection could be no protection at all because allowing any level of protection uniformly to all buyers might be prohibitively costly (and inefficient). With personalization, however, it might be efficient in such a case to give some positive level of protection to some buyers who ascribe to the protection a positive net value.
- 18. If all consumers are informed, it is questionable whether mandatory protection is needed unless a progressive distribution is the main goal of the law in granting the protection.See PartII.D.
- 19. See Omri Ben-Shahar,The Paradox of Access Justice, and Its Application to Mandatory Arbitration, 83 U Chi L Rev 1755, 176367 (2016).
- 20. See PartII.D. In this context, a regressive transfer would distribute value from low-income consumers to high-income consumers.
- 21. See PartsI.B.1 and I.B.3.
- 22. See Ben-Shahar and Posner,40 J Legal Stud at 134 (cited innote 3)(describing the relationship between airline ticket prices and protections of the ticket holders right to withdraw).
- 23. For example, the International Student Identity Card (ISIC) provides a variety of discounts for students. The student card can also be used as an identification card, as it has a picture of the cardholder and some identifying information. In that way, the seller can be sure that the student is the rightful owner of the card, and only cardholders may enjoy the cards benefits.SeeAbout Us(ISIC Association), archived at http://perma.cc/GT7S-GHZB.
- 24. Limiting the number of items that one consumer can purchase, as sometimes happens, might also be motivated by the desire of the seller to reduce the risk of arbitrage. See Jamie Robertson,Why Some Firms Limit How Much You Can Buy(BBC News, Jan 14, 2016), archived at http://perma.cc/9Y59-4FSG.
- 25. See Aaron Perzanowski and Chris Jay Hoofnagle,What We Buy When We Buy Now, 165 U Pa L Rev 315, 32729 (2017) (detailing how such preventive contractual mechanisms work in the digital media industry).
- 26. However, the uniform price would increase because many consumers would overuse the protection. This potential increase of the price, however, would not affect the individual consumers behavior because that behavior would have only a negligible effect on the price.
- 27. See Robert Gibbons and Kevin J. Murphy,Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence, 100 J Polit Econ 468, 498 (1992); Bengt Holmström,Managerial Incentive Problems: A Dynamic Perspective, 66 Rev Econ Stud 169, 17077 (1999).
- 28. See George L. Priest,A Theory of the Consumer Product Warranty,90 Yale L J 1297, 131419 (1981) (arguing that manufacturers could exclude warranty coverage for a particular use of a product or specific class of consumers for which the volume or intensity of use is relatively high, for example, by excluding coverage of commercial uses).See alsoDavid Gilo and Ariel Porat,The Hidden Roles of Boilerplate and Standard-Form Contracts: Strategic Imposition of Transaction Costs, Segmentation of Consumers, and Anticompetitive Effects, 104 Mich L Rev 983, 98893 (2006) (describing techniques that might be used by merchants to screen unwanted consumers out).
- 29. See Priest, 90 Yale L J at 1330 (cited in note 28) (explaining that some warranties for products require consumers to report about a defect in a very short period of time to avoid the risk that the consumers use added to the damage).
- 30. See Ben-Shahar and Porat, 91 NYU L Rev at 66062 (cited in note 11) (discussing how automobile drivers standard of care in accidents impacts pedestrian behavior ex ante).
- 31. Although, it could be that the improved skills would make the consumer more protected in total even if the level of protection granted by the seller decreases. Thus, if higher skills mean a consumer knowing to protect herself from certain risks, she might not benefit much from a strong protection offered by the seller. Thus, the consumer might invest to improve skills, but still not at the efficient level: some of the benefits of the investment are externalized to the seller, who provides lower protection once the consumers skills are improved.
- 32. Seethe discussion of Regime3 in PartII.B.
- 33. What about the sellers incentives under Regimes1 and 2, when the protection is uniform? When prices are uniform (Regime1), sellers have incentives to reduce the costs of the protection; when prices are personalized (Regime2), they also have such incentives.
- 34. SeeBen-Shahar and Porat,91 NYU L Rev at 64656 (cited in note 11).
- 35. But she might improve her skills when, even with an elevated standard of care, her costs of care would diminish due to her improved skills.Seeid at 649.
- 36. See, for example,Fla Stat Ann § 627.455 (Every insurance contract shall provide that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue.).
- 37. We do not enter, however, into thetechnologiesof personalization (such as using big data) because those have been discussed in length in previous papers. SeePorat and Strahilevitz, 112 Mich L Rev at 143353 (cited in note 3); Ben-Shahar and Porat, 91 NYU L Rev at 67986 (cited in note 11).
- 38. SeeOmri Ben-Shahar and Carl E. Schneider,The Failure of Mandated Disclosure,159 U Pa L Rev 647, 70420 (2011);Richard Craswell,Static versus Dynamic Disclosures, and How Not to Judge Their Successes or Failure, 88 Wash L Rev 333, 34045 (2013) (providing a model of the multidimensional nature of imperfect information in consumer markets).
- 39. See Porat and Strahilevitz, 112 Mich L Rev at 147076 (cited in note 3).
- 40. See Ben-Shahar and Schneider, 159 U Pa L Rev at 66579(cited in note 38)(documenting numerous contexts in which mandated disclosure has failed to improve consumer decisions).
- 41. See Ben-Shahar, 83 U Chi L Rev at 177982 (cited in note 19) (noting some regressive cross-subsidy effects in health care, consumer credit markets, and access justice).
- 42. See, for example, Mich Comp Laws Ann §257.1402:
If a new motor vehicle has any defect or condition that impairs the use or value of the new motor vehicle to the consumer or which prevents the new motor vehicle from conforming to the manufacturers express warranty, the manufacturer or a new motor vehicle dealer of that type of motor vehicle shall repair the defect or condition.
See also, for example, Tex Occupational Code Ann §2301.603(a) (West 2012) (A manufacturer, converter, or distributor shall make repairs necessary to conform a new motor vehicle to an applicable manufacturers, converters, or distributors express warranty.).
- 43. See, for example,UCC §2-719(3) (Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.).
- 44. See Oren Bar-Gill,Algorithmic Price Discrimination When Demand Is a Function of Both Preferences and (Mis)perceptions, 86 U Chi L Rev 217, 21920 (2019) (discussing the connection between consumer misperception and valuation of risks and benefits).
- 45. Bar-Gill,Seduction by Contractat 2632, 21415 (cited innote 1).
- 46. Id at 27.
- 47. SeeBen-Shahar, 83 U Chi L Rev at 178285 (cited in note 19) (arguing that mandated compensation can have differential effects across consumers, which can lead to cross-subsidies whereby poor consumers subsidize the compensation of wealthier consumers);George L. Priest,The Current Insurance Crisis and Modern Tort Law, 96 Yale L J 1521, 1546 (1987) (arguing that, when the risk level is related to wealth or income, a uniform premium compels those with less wealth or income to subsidize those with more).But seeAriel Porat,Misalignments in Tort Law, 121 Yale L J 82, 97107 (2011) (discussing the progressive effects of tort law when the standard of care is set uniformly for poor and rich victims, and the regressive effects when level of damages depends on victims actual lost income).
- 48. SeePartII.D.
- 49. See Bar-Gill,Seduction by Contractat 11315 (cited innote 1).
- 50. See Tom Baker and Peter Siegelman,You Want Insurance with That? Using Behavioral Economics to Protect Consumers from Add-On Insurance Products, 20 Conn Ins L J 1, 3336 (2013) (discussing peoples tendency to pay for peace of mind to an extent that goes well beyond what expected utility theory would predict). See also Bar-Gill,Seduction by Contractat 3240 (cited in note 1) (identifying that consumers misjudge expected product use). See also Oren Bar-Gill and Franco Ferrari,Informing Consumers about Themselves, 3 Erasmus L Rev 93, 10911 (2010).
- 51. See Bar-Gill,Seduction by Contractat 231 (cited innote1); Cass R. Sunstein and Richard H. Thaler,Libertarian Paternalism Is Not an Oxymoron, 70 U Chi L Rev 1159, 117273 (2003) (describing thestatus quo bias).
- 52. See, for example, Michael S. Barr, Sendhil Mullainathan, and Eldar Shafir,Behaviorally Informed Regulation,inEldar Shafir, ed,The Behavioral Foundations of Public Policy440, 44046 (Princeton 2012); Richard H. Thaler and Cass R. Sunstein,Nudge: Improving Decisions about Health, Wealth, and Happiness46 (Yale2008).
- 53. SeeBen-Shahar and Schneider,159 U Pa L Rev at 66572 (cited innote 38); Lauren E. Willis,When Nudges Fail: Slippery Defaults, 80 U Chi L Rev 1155, 11741208 (2013); Ryan Bubb and Richard H. Pildes,How Behavioral Economics Trims Its Sails and Why, 127 Harv L Rev 1593, 161632 (2014).
- 54. See, for example, Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act), Pub L No 111-24, 123 Stat 1734, codified in various sections of Titles15 and 16.
- 55. See Oren Bar-Gill and Ryan Bubb,Credit Card Pricing: The CARD Act and Beyond, 97 Cornell L Rev 967, 97577 (2012).
- 56. Pub L No 111-24, 123 Stat 1734, codified in various sections of Titles15 and 16.
- 57. 15 USC §1666i-2.
- 58. 15 USC§1666i-2 (prohibiting issuers from increasing interest rates in the first year after opening a credit card account).
- 59. See, for example,Sumit Agarwal, et al,Regulating Consumer Financial Products: Evidence from Credit Cards, 130 Q J Econ 111, 12431 (2015) (analyzing the effectiveness of consumer financial regulation with a data set covering 160 million credit card accounts).
- 60. SeePorat and Strahilevitz, 112 Mich L Rev at 144050 (cited in note 3) (exploring the different areas in which the law could use big data to personalize default rules).
- 61. See National Organ Transplant Act of 1984, Pub L No 98-507, 98 Stat 2339, codified at42 USC §§27374 (2006); Uniform Anatomical Gift Act of 1987 §10(a).
- 62. See29 CFR§1926.20(a)(1) (requiring, in the field of construction, that no contractor or subcontractor for any part of the contract work shall require any laborer or mechanic employed in the performance of the contract to work in surroundings or under working conditions which are unsanitary, hazardous, or dangerous to his health or safety).
- 63. See Margaret Jane Radin,Market-Inalienability, 100 Harv L Rev 1849, 185259 (1987) ([I]nalienability is ascribed to an entitlement, right, or attribute that cannot be voluntarily transferred from one holder to another. Inalienability in these uses may mean nongiveable, nonsalable, or completely nontransferable.); Guido Calabresi and A. Douglas Melamed,Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv L Rev 1089, 111115 (1972); Ariel Porat and Stephen Sugarman,Limited Inalienability Rules, 107 Georgetown L J *810 (forthcoming 2019), archived at http://perma.cc/WNC3-DAQT.
- 64. See, for example,Boston Housing Authority v Hemingway, 293 NE2d 831, 843 (Mass 1973) (providing that an implied warranty that the premises are fit for human occupation ... cannot be waived by any provision in the lease or rental agreement).See also generallyRoger A. Cunningham,The New Implied and Statutory Warranties of Habitability in Residential Leases: From Contract to Status, 16 Urban L Ann 3 (1979) (arguing that most jurisdictions follow the rule that obligates the landlord to repair all defects irrespective of when they emerge, notwithstanding any agreement to the contrary).
- 65. SeeChicago Board of Realtors, Inc v City of Chicago, 819 F2d 732, 742 (7th Cir 1987) (Posner concurring) (affirming a Chicago ordinance that mandated certain unwaivable protections for tenants while criticizing its effects on the housing supply for low-income individuals).
- 66. See id.
- 67. See Simon Deakin, Jonas Malmberg, and Prabirjit Sarkar,How Do Labour Laws Affect Unemployment and the Labour Share of National Income? The Experience of Six OECD Countries, 19702010, 153 Intl Labour Rev 1, 3 (2014) (discussing the argument that some labor regulations cause depressed demand from employers).
- 68. See generally Geoffrey Giles,The Effect of Usury Law on the Credit Marketplace, 95 Banking L J 527 (1978).
- 69. See Porat and Sugarman, 107 Georgetown L J at *1934 (cited in note 63) (discussing six different concerns that justify inalienability rules and the ways in which each of these concerns could be mitigated).
- 70. See id at *1114 (proposing a rule, which stands between inalienability and alienability rules, according to which holders of entitlements would be able to transferor waivetheir entitlements but retain the inalienable right to revoke the deal with no penalty).
- 71. See note 11.
- 72. See, for example,About Our Returns Policies(Amazon), archived athttp://perma.cc/4ATM-LY2U;Return Policy(Walmart), archived athttp://perma.cc/XCM9-L5UH;Will I Be Charged a Fee to Cancel My Reservation?(Frontier, Oct 1, 2018), archived at http://perma.cc/SFF4-29HX.
- 73. Indeed, there are early signs that data-driven personalization of rights to return products has begun.SeeKhadeeja Safdar,How Your Returns Are Used against You at Best Buy, Other Retailers(Wall St J, Mar 13, 2018), online at http://www.wsj.com/articles/how-your-returns-are-used-against-you-at-best-buy-other-retailers-1520933400 (visited Jan 8, 2019) (Perma archive unavailable).
- Ariel Porat
- Contract Law
- Omri Ben-Shahar