Consumer Law and Economics

Nudges are increasingly popular, in large part due to the typically low costs required to implement them. Yet most often the main cost of nudging is due not to their implementation, but rather to the opportunity costs of its successful change of the behavior of its targets. Accounting for these target opportunity costs is essential for the appropriate assessment of the welfare effects of nudges. Nonetheless, the extant literature on behavioral policies largely ignores these costs or underestimates their magnitude and, consequently, overestimates the net benefits of nudges. At times, nudges remain the most attractive policy alternative even after their opportunity costs are accounted for. On other occasions, however, traditional instruments or a no-intervention approach turn out to make more efficient policy alternatives.

This contribution analyses the challenge to courts posed by foreign currency mortgage loans, risky type of mortgages that were broadly marketed in the Central and Eastern Europe in the last 15 years. There is considerable evidence that foreign currency mortgage loans constitute a “dark chapter” in the history of European mortgage financing. We attempt to show that behavioural analysis can be used as a helpful tool in explaining at least some of the reasons why consumer borrowers opted to choose this type of risky mortgage products.

Omri Ben-Shahar and Carl E. Schneider criticise the convenient policy option to enact mandated disclosure provisions to adequately inform consumers. They argue that this insufficiently challenges an all too common practice to overcome market failures caused by information asymmetry, deters lawmakers from adopting better regulations, impairs people’s decisions, and inappropriately burdens the legally obligated market participants. Their main argument is that consumers tend to make the “economically rational” decision to n o t read the information provided under the mandated disclosure requirements. This contribution describes not only the traditional disclosure-paradigm, which assumes that transparent and effectively processed information will enable the investor to make well-founded investment decisions, but also the human flaws regarding the way we process information. Based on the failures of mandated disclosure discussed by Ben-Shahar and Schneider, the European PRIIPs regulation, which tries to enhance consumer protection based on smarter information requirements to give consumers a better chance to avoid decision they later regret, is analysed. Then additional pillars capable of bolstering the investment decision process are discussed, i.e. organisational standards, code of conduct, suitability requirements, product governance in combination with the more paternalistic element of product intervention. Finally, an outlook to future challenges posed by the potential impact of FinTech developments like robo-advice and tokenised assets will be elucidated.

Paternalistic detail-oriented rule-making as well as mandated disclosure in favor of consumers have become subject to criticism. Behavioral sciences and economics show that too much regulation might not be beneficial. Furthermore, over-information and overconfidence are jeopardizing the consumer protection objectives. Therefore, this contribution attempts to develop an approach relying on the consumer as right-holder and on an appropriate transparency concept. Clear and comprehensive information should empower the consumers to take reflected decisions.

The focus of this paper will be (in part) an apology of pre-contractual information in European and German consumer contract law against the critique by Ben-Shahar, Schneider, Bar-Gill et al. However, the paper will not try to fight the central assumptions and behavioural insights pointed out by the above mentioned and others. Rather, it looks at statutory examples that turn the debate partly from the top to the bottom by shifting the protective dimension being analysed. Further, based upon those statutory examples it aims to develop a more general concept of an ex post consumer protection through ex ante information.

The research tests the efficiency hypothesis of law by using the method of comparative law & economics applied to unfair terms law. There are four theoretical legal solutions to the signing-without-reading problem and from an economic point of view a ‘duty to draft efficient terms’ imposed upon the drafter of the standard form contract is the best solution. The research has looked at the development of real-life Dutch unfair terms law and has found out that the development is clearly in the direction of the efficient solution.

The application of the ex post unfairness controls of the Directive 93/13 in consumer financial contracts in Spain has resulted in a litigation wave that has had a significant impact in terms of financial as well as judicial costs. The terms involved in this litigation range from those allocating risks among the contracting parties to terms setting between the parties their share of the mandatory taxes and fees accompanying a mortgage loan. Spanish courts and the Court of Justice of the European Union (CJEU) have held many of these standard terms as unfair and hence, non-binding on consumers. A collateral effect of this litigation has touched contract design. Some of the cost impact of these terms are now included—without specification—as part of the overall contract price. Directive 93/13 on unfair contract terms arguably aimed at maximizing consumer welfare through, among others, enhancing transparency in consumer contracts. This chapter analyzes whether the litigation on consumer mortgage contracts and its impact in contract design has resulted in an increase of contract transparency and discusses whether the resulting contract design regarding some contract dimensions—such as exogenous costs in mortgage financing—has actually served the interests of consumers.

Consumers that want to make ethical purchasing decisions and governments that want to make policy decisions to stimulate ethical manufacturing, are left in the dark. Many products are composed of several constituting parts, with or without negative externalities, manufactured by often separate producers, which increases the general perplexity about their degree of ethicality. In ‘More Than You Wanted to Know: The Failure of Mandated Disclosure’, Professors Ben-Shahar and Schneider have exposed systemic challenges to mandated disclosurite systems. Building upon their work, and applying their lessons, this paper explores the possibility of a disclosurite system, “Deep Consumer Information”, which does not mandate, but nevertheless compels companies, due to market forces, to disclose information about the ethicality of their products. Combining Neoclassical Economics (giving consumers the opportunity to make rational choices about the relative weights they want to give to certain ethical issues, for example via intuitive sliders on an app) and Behavioral Economics (notifying the aggregate ethicality ranking of the constituting parts of a product, that can be displayed on the screen of a phone or at digital supermarket shelves), Deep Consumer Information is trying to correct the asymmetry between on the one hand; company and consumer, and on the other; company and government.

The most systematic legislative attempt to make more order in the chaotic world of privacy is the EU General Data Protection Regulation (GDPR). The primary objective of the GDPR is to level the playing field and give individuals more control over their personal data. Among other things, the GDPR aspires to force companies to be more transparent around data collection and usage. Along these lines, the GDPR requires firms to clearly communicate privacy terms to end users by using “clear and plain language” in their privacy agreements. In this study we ask whether, half a year post-GDPR, firms offer users online privacy agreements that are written in a readable manner. To that end, we empirically examine the readability of privacy policies of 300 highly popular websites. The results indicate that in spite of the GDPR’s requirement, users often encounter privacy policies that are largely unreadable. After presenting the empirical results we further discuss the legal and policy implications of our findings.

In the last decade, a wide variety of direct-to-consumer (DTC) genetic tests has become available that allow consumers to learn about their ancestry, genetic traits and propensity to genetic diseases. DTC genetic testing companies encourage consumers to share their data for research purposes. The reason is that these companies operate on two-sided business models, generating revenue primarily through selling genetic data to pharmaceuticals and research institutions. This chapter considers possible reasons for concern about consumers sharing their genetic data. It discusses various market failures that may arise in this two-sided market, ranging from information asymmetries to externalities and market power. This chapter asks whether the General Data Protection Regulation (GDPR) is able to mitigate these market failures, or whether specific laws for genetic data processing are in order. This chapter concludes that the broad research exemption in the GDPR leaves a regulatory vacuum for DTC genetic testing companies and biobanks alike.

This chapter is devoted to the analysis of the determinants and shape of public intervention in selected transition CEE countries within the foreign currency loan market through legislative and executive branches of government. The study is limited to three CEE countries that have taken different regulatory paths with extreme (Hungary), moderate (Croatia) and limited approach (Poland). The public authorities in these countries faced a dilemma whether to step into private contractual provisions in order to ease the consumers’ burden or to save the stability of domestic banking sector. We show that the shape of public interventions depended heavily on the situation in which the financial sector and macroeconomic stability were located. The better macroprudential supervision, the smaller the need for intervention after the crisis, because the smaller scale of the problem.

Recently, EU Consumer law has undergone a ‘Fitness Check’ (or REFIT). We thought that checking the fitness for purpose of a body of law would involve revisiting its purpose. This is why we expected to find in the rich REFIT documentation (over 4000 pages of studies and Commission documents) an explicit discourse on the goals of consumer law. Our aim was to connect this discourse to two lines of scholarship: a doctrinal line pointing out that EU consumer law lacks a clear direction and that, to the extent it does have one, it is too strongly geared towards market integration to the detriment of protection of the weakest, and an economically informed approach seeking to formulate a theory of harm that could underpin the enforcement of consumer law, by analogy with the practice in competition law. We agree that a clearer direction and a stronger conceptualisation of what harms the law seeks to protect consumers against would improve EU consumer law. This paper defines a ‘theory of harm’, illustrates what a theory of harm for consumer law could look like and analyses the REFIT documentation in search for elements of such a theory. Our findings are largely disappointing. We looked for something that is not there. The REFIT’s tour de force is to check fitness for purpose without discussing purpose. It does so by adopting a circular approach and defining consumer harm as instances of under-enforcement of the law. This presupposes that all possible harms are already accounted for in the law and only occur when the law is not properly enforced. We uncover an irony instead of a theory of harm. What the REFIT does delineate is a normative space in which to develop a theory of harm for the future. It consists of a virtuous triangle of empowerment, trust and a well-functioning internal market. The REFIT also suggests that an economic-based theory of harm would need to interact with several legal elements. Consumer weakness, empowerment and legitimate expectations constitute ingredients for an economically grounded, behaviourally sensible and legally workable theory of harm.

Limits of the implementation of findings from behavioural science into law and policy are increasingly recognized in the literature. In this contribution, we analyse the example of alcohol nutrition labelling to show the potential and the limits of how behavioural science can be meaningfully used to inform policy makers. We first explain what we understand to be proxies for the limit of the implementation of behavioural science into policy. Subsequently we illustrate how alcohol nutrition labelling is currently regulated and survey the on-going policy process, including an analysis of the self-regulatory proposals that have been tabled by the alcohol beverages industry. We then survey and apply existing consumer studies. Our research shows that behavioural insights support stronger alcohol nutrition labelling at a general level. However, the different options of labelling are currently understudied and provide an insufficiently sound empirical basis for policy making.

This chapter intends to show the Law & Economics (or Law & Governance) perspective on the question of whether consumer law can be regarded as a core policy instrument for pursuing ecological concerns. Consumer law regulations for more environmental protection refer to mandatory disclosure of product information, but also to further approaches such as warranty periods and liability claims. The discussion on environmental protection through consumer law is part of a broader discussion on “environmental protection through private law”. It is necessary to precisely distinguish between different environmental problems for a discussion on environmental protection through consumer law (and also generally through civil law). Immediate health hazards are more accessible to consumer legislation than quantity problems such as climate change, dwindling biodiversity or disturbed nitrogen and phosphorus cycles. There, quantity governance proves to be a far more effective instrument and also more compatible with the liberal democratic separation of powers. Consumer law can only play a complementary role. The basis for all these assessments consists in triangulated basic concepts of behavioral science (also, but not only) on environmental issues. The issues analysed were also the subject of two three-year projects each for the German Federal Government (one on the further development of climate protection law, another one on the social transformation of energy systems) and a study for the German Federal Parliament (on environmental protection through general civil law and in particular company law).