Rethinking Nudge: An Information-Costs Theory of Default Rules

Forthcoming in the University of Chicago Law Review

Harvard John M. Olin Discussion Paper No. 1031

U of Chicago, Public Law Working Paper No. 744

University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 906

56 Pages Posted: 21 May 2020 Last revised: 3 Jun 2020

See all articles by Oren Bar-Gill

Oren Bar-Gill

Harvard Law School

Omri Ben-Shahar

University of Chicago Law School

Date Written: April 24, 2020

Abstract

Policymakers and scholars — both lawyers and economists — have long been pondering the optimal design of default rules. From the classic works on “mimicking” defaults for contracts and corporations to the modern rush to set “sticky” default rules to promote policies as diverse as organ donations, retirement savings, consumer protection, and data privacy, the optimal design of default rules has featured as a central regulatory challenge. The key element driving the design is opt-out costs — how to minimize them, or alternatively how to raise them to make the default sticky. Much of the literature has focused on “mechanical” opt-out costs — the effort people incur to select a non-default alternative. This focus is too narrow. A more important factor affecting opt-out is information — the knowledge people must acquire to make informed opt-out decisions. But, unlike high mechanical costs, high information costs need not make defaults stickier; they may instead make the defaults “slippery.” This counterintuitive claim is due to the phenomenon of uninformed opt-out, which we identify and characterize. Indeed, the importance of uninformed opt-out requires a reassessment of the conventional wisdom about Nudge and asymmetric or libertarian paternalism. We also show that different defaults provide different incentives to acquire the information necessary for informed opt-out. With the ballooning use of default rules as a policy tool, our information-costs theory provides valuable guidance to policymakers.

Keywords: Default Rules, Behavioral Economics, Nudge, Transaction Costs, Information Costs

JEL Classification: D91, K12, K23

Suggested Citation

Bar-Gill, Oren and Ben-Shahar, Omri, Rethinking Nudge: An Information-Costs Theory of Default Rules (April 24, 2020). Forthcoming in the University of Chicago Law Review, Harvard John M. Olin Discussion Paper No. 1031, U of Chicago, Public Law Working Paper No. 744, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 906, Available at SSRN: https://ssrn.com/abstract=3582129 or http://dx.doi.org/10.2139/ssrn.3582129

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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