An Assessment of Behavioral Law and Economics Contentions and What We Know Empirically About Credit Card Use by Consumers

73 Pages Posted: 24 Sep 2014 Last revised: 15 Jan 2016

Thomas A. Durkin

Board of Governors of the Federal Reserve System

Gregory Elliehausen

Federal Reserve Board

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty; PERC - Property and Environment Research Center

Date Written: August 31, 2014

Abstract

“Behavioral Law and Economics” (BLE) is a specialized component of the legal literature that purports to base its conclusions on a branch of economic analysis known as behavioral economics. The central claim of BLE is that by applying findings of behavioral economics to the real world it can provide more accurate assumptions about individual behavior and decision making than neoclassical economics and thus better and more effective policy prescriptions where needed. To date, however, BLE’s claims have been almost entirely a priori, taking certain suggested biases identified in the laboratory experiments by behavioral economists and claiming that they extend significantly to actual consumer behavior and the need for regulation. Yet it is well-accepted that the proper test of the scientific validity of an economic theory is the accuracy of its predictions relative to empirically testable hypotheses, not a priori reasoning or hypothetical extensions. This paper focuses on an area where BLE has been particularly active and even influential — the analysis of consumer use of credit cards. Comparison of the claims of BLE against hypotheses of the traditional neoclassical model of consumer credit use developed over the past century finds that available empirical evidence uniformly rejects BLE’s hypotheses for consumer credit. In short, while behavioral considerations are an important component of economic analysis, its BLE extension to policy in the consumer credit area has not yet proven to be useful.

Keywords: bank overdraft, behavioral law and economics, consumer behavior, credit cards, debit cards, empirical analysis, government policy, interest rates, Juster-Shay model, mortgage loan, payday loan, shrouded fees, transaction interchange fees

JEL Classification: D12, D18, G21, G28

Suggested Citation

Durkin, Thomas A. and Elliehausen, Gregory and Zywicki, Todd J., An Assessment of Behavioral Law and Economics Contentions and What We Know Empirically About Credit Card Use by Consumers (August 31, 2014). George Mason Law & Economics Research Paper No. 14-46. Available at SSRN: https://ssrn.com/abstract=2499819 or http://dx.doi.org/10.2139/ssrn.2499819

Thomas A. Durkin

Board of Governors of the Federal Reserve System ( email )

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

Gregory Elliehausen

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2326 (Phone)

Todd J. Zywicki (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8091 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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