Optimal Defaults in Consumer Markets

Harvard Law School John M. Olin Center Discussion Paper No. 863

University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 764

25 Pages Posted: 13 Jun 2016 Last revised: 14 Jul 2016

See all articles by Oren Bar-Gill

Oren Bar-Gill

Harvard Law School

Omri Ben-Shahar

University of Chicago Law School

Date Written: June 9, 2016

Abstract

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

Bar-Gill, Oren and Ben-Shahar, Omri, Optimal Defaults in Consumer Markets (June 9, 2016). Harvard Law School John M. Olin Center Discussion Paper No. 863, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 764, Available at SSRN: https://ssrn.com/abstract=2793128 or http://dx.doi.org/10.2139/ssrn.2793128

Oren Bar-Gill (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Omri Ben-Shahar

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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