Too Little, Too Much, Not Just Right: Seduction by Contract and the Desirable Scope of Contract Regulation

Consumers are sovereign: that is the basic premise—some would say tenet—of the economic analysis of contract law. According to this line of thought consumers roam the universe in search of welfare enhancing transactions. In their journey they know to identify a good deal when they see it; and to avoid bad offers that are not expected to best serve their interests. The normative conclusion that is often deduced from this line of thought is that contracts reflect Pareto improvements, and that the state should not regulate consensual obligations.1 This traditional paradigm of the economic analysis of consumer contract has been under internal and external attacks. Scholars loyal to the rational-choice framework demonstrated that incorporating into the traditional contracting model elements such as asymmetric information can lead to results that suggest that contracts might be inefficient.2 Other scholars built their analysis on the assumption that consumers often exhibit bounded rationality. That is, they make systematic mistakes that inhibit them from maximizing their expected utility. This line of literature has shown that behavioral phenomena such as the availability bias might drive people to sub-optimal transactions.3