Small Business and the False Dichotomies of Contract Law
94 Pages Posted: 6 Sep 2004
Date Written: September 2004
The article explores the classic consumer-merchant dichotomy from the vantage of small businesses. Using empirical data and the psychology, economics, and management literature, it shows that small businesses, treated like large businesses throughout most of contract and commercial law, in fact behave more like consumers. Small businesses lack the financial strength of large businesses. They generally lack the information gathering ability of large businesses. Finally, they generally are more prey to cognitive errors than are large businesses. As a result, small businesses lose in two ways. When they deal with consumers, they are presumed to have the power, information, and cognitive capacity of large firms. The law thus obliges them to grant protections based on asymmetries that may not exist. When they deal with large businesses, the law treats them as essentially equal, even though small businesses may suffer from the same disadvantages that require legal intervention for consumers. The article considers the ways in which the law can deal with this false dichotomy and suggests some solutions, particularly in the way the law treats risk allocation.
Keywords: heuristics, biases, cognition, behavioral law and economics, small business, consumer, information, groupthink, group polarization, availability, endowment effect, debiasing
JEL Classification: D18, D23, D81, K12, K23
Suggested Citation: Suggested Citation