Online Symposium on Oren Bar-Gill’s Seduction By Contract, Part I: Credit Cards

This is the first in a series of posts on Oren Bar-Gill’s recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets.  The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas.  This post is contributed by University of Texas Law Professor Angela Littwin.

I am currently teaching aseminar on credit cards, so I was thrilled to present on the work of a majorthinker in the field. If there’s one person whose name is synonymous with thebehavioral economics of credit cards, it’s Oren Bar-Gill. His work has beeninfluential within the academy and outside of it. The recent federal overhaul ofcredit card law, The Credit Card Accountability Responsibility andDisclosure Act of 2009 (CARD Act),was heavily influenced by law and behavioral economics. (Here’s another CARDAct link for those who want a summary instead of the whole statute.) Credit cards arealso a great topic for Contracts, because with credit cards, contractdesign is the entire game. 

The credit card chapter in Seduction by Contract is verysuccessful. If you want a primer on exactly what the trouble is with creditcards, this chapter is perfect place for you. The crux of Bar-Gill’s argumentis that credit card issuers use complexity and cost deferral to seduce consumersinto borrowing more in the short-term than they would prefer in the long-term.He illustrates how specific credit card pricing features play into theimperfect rationality of optimism-biased consumers. He concludes by discussingthe recent CARD Act and with policy proposals centered on use disclosure. 

Convincing people that creditcard contracts are complex is an easy sell. One way Bar-Gill does so is bysimply listing all the of types fees consumers can pay (i.e., overlimit fees orapplication fees). There are nineteen of them. And this number doesn’t eveninclude types of interest. I can also add that in my seminar, we have a day inwhich I ask the students to find and read a credit card contract. Studentroutinely say that this is the hardest reading they have done in law school.

What’s even more interestingthan the complexity itself is the purpose of it. Credit card issuers usecomplexity as a way of shielding their pricing model from consumers. Issuersprovide benefits through short-term, more salient product features (like teaserrates and rewards) and assess costs through long-term, less salient productfeatures (like late fees and default interest rates). This pricing structureenables – or rather requires – issuers to compete for consumers via deception.

Bar-Gill’s policy proposal,use disclosure, addresses this deception directly. Use disclosure would requirecredit card issuers to give consumers information on how they use their creditcards. The CARD Act does some of this, but Bar-Gill proposes taking it further.Under Bar-Gill’s proposal, consumers would receive an electronic file that theycould take to a new issuer or an intermediary, like Bill Shrink,to get a new total-cost credit card quote. Use disclosure seems like a greatway to encourage consumer behavioral learning. My one critique is thatconsumers would have to learn the hard way. I think that many consumers wouldhave to get in real trouble with credit cards before the behavioral learningwould take place.

This is why my onlydisappointment with the chapter is that Bar-Gill stopped with use disclosure. Iwanted to see him explore the CARD Act in more detail and offer more policyideas. So I’ll end this blog post as I ended my talk, with a plug to read his paperwith Ryan Bubb,Credit Card Pricing: The Card Act and Beyond (Cornell L. Rev., 2012), whichaddresses both of those points and more.

[Posted, on Angela Littwin’s behalf, by JT]