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- Title
Behavioral Economics Goes to Court: The Fundamental Flaws in the Behavioral Law & Economics Arguments Against No-Surcharge Laws.
- Authors
Zywicki, Todd J.; Manne, Geoffrey A.; Stout, Kristian
- 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. The issue reached the Supreme Court, which granted certiorari in Expressions Hair Design v. Schneiderman 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 realworld application of behavioral economic theories should not be uncritically accepted, and this is especially true when such claims are advanced to challenge a state's commercial regulation on constitutional grounds. And courts should be particularly careful before relying on such claims where the available evidence fails to support them. In this case, the underlying theories are so poorly developed that they have actually been employed elsewhere to support precisely opposite arguments. Moreover, 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. Courts should exert great caution before resting judicial decision-making on such poorly supported suppositions. The plaintiffs in the case (five New York businesses) and their amici (scholars of both behavioral law and economics and First Amendment law) argued 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 relied on a claim derived from behavioral economics: that a surcharge and a discount are mathematically equivalent, but, 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. The plaintiffs and amici claim that the prohibition on surcharging is thus an impermissible restriction on commercial speech (and not a permissible regulation of conduct) because the only difference between the two, they asserted, is how they are labeled. 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 plaintiffs' 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. On March 29, 2017, the Supreme Court issued an opinion remanding the case for further proceedings. It did so, however, solely on the basis of First Amendment commercial speech claims, holding that the New York state regulation in question implicated speech concerns by limiting how merchants are permitted to express the difference when they decide to charge one price for payment in cash and another for payment by credit. Notably, the Supreme Court did not address the Behavioral Law and Economics ("BLE") claims in reaching its holding. Without guidance from the Court to constrain the lower court's consideration of the BLE claims, the lower courts will surely be pushed by the merchants and are likely to factor into subsequent decisions in the case assessing whether the law's speech restrictions are constitutionally permissible. Thus, despite the Court resolving the question whether, contrary to the state's argument, enforcement of the New York no-surcharge law implicates First Amendment issues, the question of BLE as a guide to judicial decisionmaking is still very much alive in the case - and, of course, may resurface again in other, unrelated cases.
- Subjects
UNITED States; LAW &; behavioral economics; CONSUMER credit; SURCHARGES; EXPRESSIONS Hair Design v. Schneiderman (Supreme Court case); CONSTITUTIONAL law; UNITED States. Consumer Financial Protection Bureau; COMMERCIAL speech laws
- Publication
Missouri Law Review, 2017, Vol 82, Issue 3, p769
- ISSN
0026-6604
- Publication type
Article