Consumer Biases and Mutual Ownership

53 Pages Posted: 22 Oct 2011 Last revised: 12 Jul 2013

Ryan Bubb

New York University School of Law

Alex Kaufman

Board of Governors of the Federal Reserve System (FRB)

Date Written: October 18, 2011

Abstract

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.

Suggested Citation

Bubb, Ryan and Kaufman, Alex, Consumer Biases and Mutual Ownership (October 18, 2011). Journal of Public Economics, Vol. 105, 2013; NYU Law and Economics Research Paper No. 11-35. Available at SSRN: https://ssrn.com/abstract=1945852 or http://dx.doi.org/10.2139/ssrn.1945852

Ryan Bubb (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
(212)992-8871 (Phone)

HOME PAGE: http://https://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=34148

Alex Kaufman

Board of Governors of the Federal Reserve System (FRB) ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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