Behavioral Law & Economics Goes to Court: The Fundamental Flaws in the Behavioral Law & Economics Arguments Against No-Surcharge Laws

ICLE Financial Regulation Research Program Paper Series 2016-1

72 Pages Posted: 12 Dec 2016  

Todd J. Zywicki

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

Geoffrey A. Manne

International Center for Law & Economics (ICLE)

Kristian Stout

International Center for Law and Economics

Date Written: December 9, 2016

Abstract

During the past decade, academics — predominantly scholars of behavioral law and economics — have increasingly turned to the claimed insights of behavioral economics in order to craft novel policy proposals in many fields, most significantly consumer credit regulation. Over the same period, these ideas have also gained traction with policymakers, resulting in a variety of legislative efforts, such as the creation of the Consumer Financial Protection Bureau. Most recently, the efforts of behavioral law and economics scholars have been directed toward challenging a number of state laws that regulate retailers’ use of surcharge fees for consumer credit card payments. In part as a result of these efforts, the issue has come before multiple courts, with varying outcomes.

In 2016 the issue reached the Supreme Court, which granted certiorari in Expressions Hair Design v. New York for the October 2016 term. The case, which centers on a decades-old New York state law that prohibits merchants from imposing surcharge fees for credit card purchases, represents the first major effort to ground constitutional law (here, First Amendment law) in the claims of behavioral economics.

In this article we examine the merits of that effort. Claims about the real-world application of behavioral economic theories should not be uncritically accepted — especially when advanced to challenge a state’s commercial regulation on constitutional grounds. And courts should be especially careful before relying on such claims where the available evidence fails to support them, where the underlying theories are so poorly developed that they have actually been employed elsewhere to support precisely opposite arguments, and where alternative theories grounded in more traditional economic reasoning are consistent with both the history of the challenged laws and the evidence of actual consumer behavior.

The Petitioners in the case (five New York businesses) and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: namely, that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech (and not a permissible regulation of conduct).

Assessing the merits of the underlying economic arguments (but not the ultimate First Amendment claim), we conclude that, in this case, neither the behavioral economic theory, nor the evidence adduced to support it, justifies the Petitioners’ claims. The indeterminacy of the behavioral economics underlying the claims makes for a behavioral law and economics “just-so story” — an unsupported hypothesis about the relative effect of surcharges and discounts on consumer behavior adduced to achieve a desired legal result, but that happens to lack any empirical support. And not only does the evidence not support the contention that consumer welfare is increased by permitting card surcharge fees, it strongly suggests that, in fact, consumer welfare would be harmed by such fees, as they expose consumers to potential opportunistic holdup and rent extraction.

As far as we know, this is the first time the Supreme Court has been expressly asked to consider arguments rooted in behavioral law and economics in reaching its decision. It should decline the offer.

Keywords: behavioral economics, behavioral law & economics, law & economics, First Amendment, commercial speech, pricing, payment cards, credit cards, surcharging, discounting, bias, endowment effect, experimental economics, fee shrouding, framing effect, consumer behavior

JEL Classification: D03, D18, G02, G28, K10, K29

Suggested Citation

Zywicki, Todd J. and Manne, Geoffrey A. and Stout, Kristian, Behavioral Law & Economics Goes to Court: The Fundamental Flaws in the Behavioral Law & Economics Arguments Against No-Surcharge Laws (December 9, 2016). ICLE Financial Regulation Research Program Paper Series 2016-1. Available at SSRN: https://ssrn.com/abstract=2883428

Todd J. Zywicki

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

Geoffrey A. Manne (Contact Author)

International Center for Law & Economics (ICLE) ( email )

3333 NE Sandy Blvd
Suite 207
Portland, OR Oregon 97232
United States
503-770-0076 (Phone)

HOME PAGE: http://www.laweconcenter.org

Kristian Stout

International Center for Law and Economics ( email )

3333 NE Sandy Blvd., Suite 207
Suite 300
Portland, OR Oregon 97232
United States
5037700076 (Phone)
5037700076 (Fax)

HOME PAGE: http://www.laweconcenter.org

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