35 Pages Posted: 27 May 2011 Last revised: 3 Aug 2011
Date Written: May 24, 2011
Modern consumer contracts set aside a lot of state law and legal tradition that would normally govern consumer transactions. Instead, they contract around the standards, creating their own governing law. While generally recognized as efficient and proper in sophisticated bargaining, these “outlaw contract terms” in consumer contracts can lead to inefficient risk distribution, as well as inefficient consumption of risk by consumers. Because of the structure of the consumer market and the constraints on consumer rational choice, the market does not create the proper incentives for producers to use only optimally efficient terms in consumer contracts. Principles of liberty have long militated for increased freedom of contracting. However, the unique market abnormalities in consumer contracting means that while more choices in contract terms can lead to more theoretical freedom, in aggregate those choices will become less meaningful. When signaling and decision making is spread across a greater number of terms, consumers are forced to make a larger percentage of their decisions through irrational methods. This article will show that the structure of the present system incentivizes producers to use inefficient contract terms in order to maintain a competitive position. This article argues that the problem can be minimized by clearly defining the legal rights of the parties and by preventing reallocation of those rights ex ante. Essentially, increased mandatory default terms could be implemented with minimal harm to producers over the long run. The mandatory defaults will alter the timing of negotiations so that rights are fixed at a later period in time, when inefficient information and cost asymmetries are less pronounced.
Keywords: Consumer, Contracts, Economics, Law and Economics, Consumer Contracts, Boiler Plate, Consumer Terms, Retail Contracts
Suggested Citation: Suggested Citation
Pounders, Larry R., Outlaw Contract Terms in Consumer Contracting: Mispricing, Market Inefficiency and the Overconsumption of Risk (May 24, 2011). Available at SSRN: https://ssrn.com/abstract=1852008 or http://dx.doi.org/10.2139/ssrn.1852008