Consumer Biases and Mutual Ownership
New York University School of Law
Board of Governors of the Federal Reserve System (FRB)
October 18, 2011
NYU Law and Economics Research Paper No. 11-35
In this paper we show how ownership of the firm by its customers, as well as nonprofit status, can prevent the firm from exploiting consumer biases. By eliminating an outside residual claimant with control over the firm, these alternatives to investor ownership reduce the incentive of the firm to offer contractual terms that exploit the mistakes consumers make. However, customers who are unaware of their behavioral biases, and consequent vulnerability to exploitation, may fail to recognize this advantage of non-investor-owned firms and instead continue to patronize investor-owned firms. We present evidence from the consumer financial services market that supports our theory. Comparing contract terms, we find that mutually owned firms offer lower penalties, such as default interest rates, and higher up-front prices, such as introductory interest rates, than do investor-owned firms. However, consumers most vulnerable to these penalties are no more likely to use mutually owned firms.
Number of Pages in PDF File: 47working papers series
Date posted: October 22, 2011 ; Last revised: December 8, 2012
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