Optimal Defaults in Consumer Markets
Harvard Law School John M. Olin Center Discussion Paper No. 863
25 Pages Posted: 13 Jun 2016 Last revised: 14 Jul 2016
Date Written: June 9, 2016
The design of default provisions in consumer contracts involves an aspect that does not normally arise in other contexts. Unlike commercial parties, consumers have only limited information about the content of the default rule and how it fits with their preference. Inefficient default rules may not lead to opt outs when they deal with technical aspects consumers rarely experience and over which consumers’ preferences are defined only crudely. This paper develops a model in which consumers are uninformed about their preferences, but can acquire costly information and then choose a contract term that best matches their preferences. The paper explores the optimal design of default rules in such environments, and how it differs from the existing conceptions of efficient default rule design.
Keywords: Contracts, default rules, imperfect information, misperception, consumer protection, privacy
JEL Classification: D11, D18, K12
Suggested Citation: Suggested Citation