ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Friday, February 24, 2017

Behavioral & Experimental Perspectives on the Contracting Process

Last doctrinal panel session of the afternoon involved a variety of empirical studies on the actual contracting process. Fascinating stuff. As always, beware of the roughness of the notes, as they could contain errors.

Buyer Beware

Eyal Zamir (Hebrew University of Jerusalem) "Marketing Techniques, Pricing Methods, and the Law of Consumer Contracts."  Numerous studies show that price framing impacts consumer choices in significant disproportion to the actual money involved. Describing a price differentiation as a "discount" rather than a "surcharge" substantially impacts customer perception, as do pricing methods such as charging $1.99 rather than $2.00 because of disproportionate reliance on the left digit. Another effective strategy is the use of a "regular price" term coupled with a discount price. A high regular price suggests higher quality and perception of a bargain on an item sold at a discount. In the U.S. the FTC can use 16 CFR 233.1(b) to police a deceptive regular price, but the prohibition is convoluted and multifactor, leading to little FTC enforcement of the provision. Interesting, studies show consumers don't believe the "regular price" but know that they are influenced by it. These kind of pricing practices present a quandary for consumer protection, as do some uses of rebates and gifts. Humorous moment: How many economists does it take to change a lightbulb? Answer: None, because the market will take care of it.

Russell Korobkin (UCLA) "Bargaining with the CEO: The Case for 'Negotiate First, Choose Second.'" A longstanding debate exists over CEO compensation.  How much are they worth relative to what they are paid? Advocates suggest too much or too little based on their perspective from where the CEO value is derived. Better question to act, according to Korobkin, is whether CEOs are overpaid versus what firms could be paying them. The problem is the process: choose first, negotiate second. Better approach would be to reverse this, and negotiate the salary with a few select finalists. At this point, the firm has more bargaining power, but both sides in the negotiation get more information on which to make a rational choice. The firm avoids commitment and consistency bias in inflating CEO compensation.  Korobkin and co-author Michael Dorff did a study using 206 law students placed in roles of a hiring "Director" and three "Candidates." Both sides were given incentive to maximize their relative cost position. Candidates are told to assume that the other two are "well qualified," as are they. Directors are told that outside consultant rated all the finalists as equal. Tested three conditions: (1) choose first, negotiate second (C1N2), (2) negotiate first will all three candidates individually before hiring a candidate (N1C2), (3) candidates pre-submit their minimum salary requirements (N1C2 also). Control group (1) averaged $8.62 MM, (2) averaged $6.56MM, and (3) averaged $7.58 MM. So why don't firms adopt N1C2? Possible answers are (a) director self-interest--but that isn't universal enough, (b) higher transaction costs--but these costs are not proportionately higher, or (c) firms rate candidates as having widely different value--but how would most candidates know this. Better hypothesis: Firms are concerned about losing candidates by adopting a N1C2 process and it may be perceived as unfair.  But study didn't support this hypothesis either.

Dave Hoffman (Penn) and Tess Wilkinson-Ryan (Penn): "The Psychology of Consumer Contracts." Why do layperson intuitions about contracts matter as a substantive? Some answers: Rules have to comport on some level to ensure legitimacy of the rules; parties use intuitions as their basis for taking precautions against overreach; and simple majoritarian doctrine. The authors worked on a study of the role of formalities in the perceptions of formation: When do parties think a contract is formed when given a hypothetical with several arguable points of formation? Signing the paperwork was actually the vast majority understanding (62%). The layperson understanding is that a document titled a "contract" is most significant. When told that a "contract period" didn't begin for three days, subjects said they felt more free to shop around. What about contracts as having a "moral meaning" in a world of standard forms that simply can't actually be read? When provided various scenarios for ways an obnoxious term could be provided to a consumer, consumers don't distinguish between a set contract and a rolling contract in connection with their respect for the enforceability of the term. When the offending policy was online rather than in the document, parties were less sanguine about the policy and its enforceability. Study also inquired as to what parties think the law actually is. Judge's declaration only mattered when it was an invalidation of the contract. Another study showed that Millennials are three times more likely to think that an oral contract is not legitimate as compared to a "written" internet contract. Laypersons shown the cross-collateralization provision from Williams v. Walker-Thomas Furniture were far less empathetic to the plaintiff if they were. But once told that a doctrine of unconscionability exists, Millennials are more likely to think it applies that the doctrine would apply in real life.

KCON12-Behavioral Panel

From left: Dave Hoffman, Tess Wilkinson-Ryan, Eyal Zamir, and Russell Korobkin (not pictured Deborah Post (Moderator))

KCON12-Logo

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