Taxing Contractual Complexity
Michael Simkovic & Meirav Furth-Matzkin, Taxing Contractual Complexity, 26 University of Pennsylvannia Business Law Journal 190 (2023)
69 Pages Posted: 1 Feb 2022 Last revised: 9 Jan 2024
Date Written: January 1, 2022
Abstract
Accompanying slide presentation available at http://ssrn.com/abstract=4019705
Pigouvian taxes are often used to limit environmental externalities such as pollution. We argue that consumer contracts generate externalities by overwhelming consumers’ attention. Depleting each consumer’s attention harms consumers collectively because lower comprehension levels enable sellers to adopt less efficient and more one-sided terms. We propose to tax sellers in proportion to the costs that comprehending their contracts would impose on consumers. This would force sellers to internalize these costs and incentivize them to invest in contract simplification and forego strategic obfuscation. As a result, the costs to consumers of comprehending would decrease, and comprehension rates would rise. To further penalize inefficient contracts while reducing the tax burden on efficient contracts, we propose subsidizing consumer comprehension and information sharing efforts. Inefficient contracts would thereby be strongly disincentivized.
Note: This article was previously titled "Pigouvian Contracts".
Keywords: contracts, consumer contracts, form contracts, contracts of adhesion, no-reading problem, tax, information asymmetry, informed minority
JEL Classification: D11, D18, D02, D23, D62, D83, D82, H23, H25, K12, K2, K34
Suggested Citation: Suggested Citation