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Inefficient clauses or consumer choices? Lessons from cognitive psychology

di - 1 Ottobre 2012
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When heterogeneous consumers converge on a market, firms are faced with the following dilemma: whether to insert efficient clauses to meet the requirements of wealthy customers with a high mental budget or to insert inefficient clauses to allow less well-off customers to buy larger quantities of the goods they produce? In theory the market should be fragmented: some firms will aim at the rich customers and others at the poor ones. This appears to be what basically happens in practice, but a problem arises if there is a monopoly market. In this case the monopolist can be expected to try and win over marginal customers, i.e. those that have already spent the whole amount they budgeted for the purchase of the good in question, and it will do so by inserting clauses that are to its advantage and free a part of the money that can still be spent on purchases of that good by increasing consumers’ mental budgets through the inclusion of sacrifices of various kinds that are not counted, instead, in the budget. From this standpoint it is not to be expected that the terms included by the monopolist to win over marginal customers will be efficient ones with regard to the latter’s preferences but rather inefficient ones allowing them to make a saving that they can use.
Thus, a clause introduced by the monopolist waiving liability for harm caused by the good sold to customers can be seen as an efficient clause because marginal consumers have a low risk of suffering harm, but it can also be seen as an inefficient clause that serves to free resources to be spent on additional purchases of the good in question. It is as if individuals have a reserve of energy, time, resilience and acceptance of risk that they use to increase their purchases of the good, even if that energy, time, resilience and risk have a greater cost in money terms than what the counterparty would have to spend to take the same action in the customers’ interest (so that it would be optimal to include a clause that would require the firm drawing up the contract to bear the burden of the service).

The traditional interpretation
If that is how things stand, one should not accept the interpretation according to which firms exploit information asymmetry to include inefficient clauses that consumers do not notice. Consumers prefer clauses of this kind. It follows from the traditional interpretation that a mandatory change to such clauses in order to make them efficient, even if it causes an increase in the overall price of the good, would put consumers in a better position because, for example, they would pay an increase of 2 for a clause that is worth 5 to them. They would therefore stand to gain 3. The interpretation put forward here, instead, stresses the fact that consumers, once they have used the amount they have allocated in their mental budgets for the purchase of a given good, do not want to spend any more on that good but are willing to make efforts, devote time or run risks to save on what they would spend and use this saving to buy other goods of the same type (since it is reasonable to imagine that when the producer changes the terms in his favor he will also lower the price in response to competition). It can therefore be said that we are faced with an example of irrational behavior, of a bias, but empirical experiments may justify such behavior.
The law on abusive clauses contained in the Italian Consumer Code, which is a direct consequence of a series of European directives, could thus have a double interpretation: on the one hand it could appear to provide an efficient legal framework because it eliminates the clauses that consumers do not want and for whose removal they would be willing to pay an amount greater than the production cost; on the other hand it could upset mental calculations, the mental accounting of real men, who would find themselves unable to save by accepting sacrifices and costs and devoting time so as to be able to buy additional quantities of the good in question, even when the sacrifices accepted by the consumer have a negative economic value greater than the cost of amending the clause.
A traditional economist’s assessment of such behavior would be in terms of inefficiency, because consumers are going to accept a sacrifice that is greater than what they would be willing to pay to avoid it. However, the allocation of their total spending among different jars, i.e. mental budgeting, does not allow money to be transferred from one jar to another. Bias would cause the irrational behavior.
It is thus a question of understanding the role that the legislator could play in a situation of this type. A first answer comes from the school of thought that, as mentioned earlier, is known as libertarian paternalism. According to this doctrine, the legislator should direct individuals towards a choice, while always leaving them the possibility of opting out. The term “paternalism” is used because, owing to the status quo bias, the legislator’s default choice is often the same as that of individuals. An economic man would have no problem in opting out if this were his best choice and the costs of dropping out were low. Real men tend to stick by the default rules, even when the cost of opting out are minimal, truly negligible. They are guided by a force of inertia.
At this point the legislator, following the route of libertarian paternalism, could insert efficient default clauses, with the aim of encouraging real men to make the choices that would maximize their welfare. The problem is that if libertarian paternalism is to remain true to itself, it would need to adopt provisions that are variable by agreement, and this would raise the question of the derogations from these provisions that the drafting firm can introduce. In other words, even if the legislator were to choose efficient clauses, relying on consumers not asking to opt out, the drafting firm will insert inefficient clauses that are to his advantage and allow consumers to save on what they would spend and use this saving to buy more of the good produced.
The Italian legislator has taken more effective action in its transposition of a Community Directive; it has provided for clauses that cause a significant imbalance between rights and obligations to be null and void; such clauses can be considered, with a fair degree of approximation, to be inefficient clauses and in this way consumers are no longer free to choose an inefficient clause entailing a sacrifice in terms of energy and time, so as to have more money available.
Starting from the model of the micro-economy, the market in which the standard forms for governing relations are present tends to fail owing to adverse selection (the market for lemons). Starting instead from cognitive psychology research, one could arrive at the conclusion that the market supplies what real men want, even if on the basis of homo oeconomicus models that is irrational.

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