Tuesday, March 19, 2013
This is the first in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets. The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas. This post is contributed by University of Texas Law Professor Angela Littwin.
I am currently teaching a seminar on credit cards, so I was thrilled to present on the work of a major thinker in the field. If there’s one person whose name is synonymous with the behavioral economics of credit cards, it’s Oren Bar-Gill. His work has been influential within the academy and outside of it. The recent federal overhaul of credit card law, The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), was heavily influenced by law and behavioral economics. (Here’s another CARD Act link for those who want a summary instead of the whole statute.) Credit cards are also a great topic for Contracts, because with credit cards, contract design is the entire game.
The credit card chapter in Seduction by Contract is very successful. If you want a primer on exactly what the trouble is with credit cards, this chapter is perfect place for you. The crux of Bar-Gill’s argument is that credit card issuers use complexity and cost deferral to seduce consumers into borrowing more in the short-term than they would prefer in the long-term. He illustrates how specific credit card pricing features play into the imperfect rationality of optimism-biased consumers. He concludes by discussing the recent CARD Act and with policy proposals centered on use disclosure.
Convincing people that credit card contracts are complex is an easy sell. One way Bar-Gill does so is by simply listing all the of types fees consumers can pay (i.e., overlimit fees or application fees). There are nineteen of them. And this number doesn’t even include types of interest. I can also add that in my seminar, we have a day in which I ask the students to find and read a credit card contract. Student routinely say that this is the hardest reading they have done in law school.
What’s even more interesting than the complexity itself is the purpose of it. Credit card issuers use complexity as a way of shielding their pricing model from consumers. Issuers provide benefits through short-term, more salient product features (like teaser rates and rewards) and assess costs through long-term, less salient product features (like late fees and default interest rates). This pricing structure enables – or rather requires – issuers to compete for consumers via deception.
Bar-Gill’s policy proposal, use disclosure, addresses this deception directly. Use disclosure would require credit card issuers to give consumers information on how they use their credit cards. The CARD Act does some of this, but Bar-Gill proposes taking it further. Under Bar-Gill’s proposal, consumers would receive an electronic file that they could take to a new issuer or an intermediary, like Bill Shrink, to get a new total-cost credit card quote. Use disclosure seems like a great way to encourage consumer behavioral learning. My one critique is that consumers would have to learn the hard way. I think that many consumers would have to get in real trouble with credit cards before the behavioral learning would take place.
This is why my only disappointment with the chapter is that Bar-Gill stopped with use disclosure. I wanted to see him explore the CARD Act in more detail and offer more policy ideas. So I’ll end this blog post as I ended my talk, with a plug to read his paper with Ryan Bubb, Credit Card Pricing: The Card Act and Beyond (Cornell L. Rev., 2012), which addresses both of those points and more.
[Posted, on Angela Littwin's behalf, by JT]