Oren Bar-Gill, at the intersection of law, contracts and human behavior

Oren Bar-Gill

Credit: Jessica Scranton Oren Bar-Gill

Professor Oren Bar-Gill LL.M ’01 S.J.D. ’05 came to Harvard Law School last year from NYU Law School with a reputation as a leading expert on contract law and behavioral law and economics.

The author of “Seduction by Contract: Law, Economics and Psychology in Consumer Markets,” (Oxford University Press, 2012), Bar-Gill is continuing his research and writing in this area at HLS and recently shared some thoughts about his current and anticipated work.

How would you describe the intersection of law, contracts, and human behavior?

“‘Behavioral economics’ is kind of the buzzword and it combines economics and psychology. The standard classical model assumes rational actors; the behavioral economics approach also has a model, but it’s not a theoretical notion of rationality. It’s based on empirical evidence about how people actually behave that’s been collected by psychologists and behavioral economists.”

What has surprised you the most about human behavior toward contracts?

“It’s surprising how people can be both very smart and very stupid, depending on context. Individuals know how things work and how to navigate very complex problems and challenges in their lives, including their interactions with other individuals and their contract interactions as well. But there are also these pitfalls—places where they can make stupid mistakes. In contracting, if someone offers us a zero percent APR for the first year or other low introductory offers or a free phone if we sign a two-year contract with a provider, we’re excited by this. We understand there’s no such thing as a free lunch and that eventually we’re going to pay for this, but we fall for these traps, time and time again. That’s why sellers routinely use them. It’s myopia. We prefer to focus on the present instead of the future. And it’s just optimism. We don’t think we’re going to incur these other costs or prices or fees in the future.”

What new things are you working on now?

“One of the projects I’m working on is called ‘(Mis)perceptions of Law in Consumer Markets.’ The topic of this paper, this project, has to do with the many situations where we as consumers buy products without having any real direct information about important quality dimensions. When we buy food, we don’t know just by looking at it how it was treated, what kinds of safety measures were taken to prevent various diseases or contamination. So we rely on the law to protect us, and we believe that some kind of regulator or court will make sure that there aren’t really bad things in our food and our drink. The trouble is that in many of these cases, our perceptions of the law are mistaken or false. We might overestimate the degree of protection that the law provides. So the question then is: How should we adjust the law in response?”

In terms of public policy, do you think consumers should generally be better informed about products in the U.S.?

“A big debate in the literature, including the work that I’ve done, is: What should we do? Should we start with the less intrusive, disclosure type interventions? Or if we think that consumers just don’t get it, should we just take away all the choice and decide for them as regulators? My personal inclination is that we should start with the types of interventions and policy tools that facilitate the work of markets rather than supplant markets altogether. If we can help markets work better by informing consumers, by nudging them in the right direction (borrowing the term popularized by my colleague Cass Sunstein), and if we can facilitate the operation of markets through sophisticated disclosure rules, it’s better to try that first. In some cases, that might not work and we’ll need more heavy-handed interventions.”

What would be an example of this kind of disclosure?

“One type of disclosure that can work is very simple disclosure . The idea is to boil down all the information, or as much of it as you can, into a single number. Take cell-phone contracts. There are so many different pricing dimensions—you might pay for minutes, for data, for text—there are various fixed fees and overcharge fees, limits on your plans. There is large multi-dimensionality in all these pricing structures. The idea behind this simplified disclosure is to boil everything down to a single number, like an annual cost of ownership. So the cell phone company should tell you the overall annual cost to you for using their cell phones. Consumers could just look at two numbers and choose the lower one.”

Are there other new topics you’re beginning to look into?

“Another project I’m in the very early stages of studies one of the implications of the ‘big data’ revolution’ – the way that sellers price their products in consumer markets. Now, with big data and companies like Google and Facebook and all these data brokers who collect information from our browsing behavior, sellers have a lot of individualized information about us, what we value and what we do not value. We’re actually very close to a situation where we can charge different prices to every individual consumer. What’s interesting is that from an efficiency perspective, this is actually a good thing. Before big data, monopolists couldn’t price discriminate very well—they set one single price, somewhere between what the low people can pay and what the high people can pay and that priced certain consumers out of the market; it’s called monopoly dead-weight loss. This is why we don’t like monopolists—because the prices are too high for some people. With big data, if you can perfectly price discriminate and charge a different price to each consumer, then the monopoly dead-weight loss goes away. Everyone who wants to buy, buys. We may not like it much still because of distributional issues—all the surplus goes to the monopolist who can extract everything from us to the last penny of what the product is worth to us. But from an efficiency perspective, it seems like a good thing. Using a behavioral lens, this perfect price discrimination becomes more problematic: the monopolist will be extracting not what the product is actually worth to us, but what we think the product is worth to us. This could result is a large efficiency loss, in addition to the distributional concern.”