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date: 14 July 2020

Abstract and Keywords

Consumer transactions differ from the archetypal arm’s-length contract on which both classical contract law and neoclassical economics focus. These transactions are marked by an imbalance between sellers and buyers. The underlying concern is that imperfectly informed and imperfectly rational consumers might fail to fully comprehend the costs and benefits of the product or service that they are purchasing. Moreover, sophisticated sellers can be expected to design their products, prices, and contracts in response to consumer misperception. Indeed, the design of consumer transactions can best be viewed as the outcome of an interaction between market forces and the psychology of consumers. The resulting behavioral market failure hurts consumers and reduces efficiency. Legal responses range from hard paternalistic policies to soft paternalistic policies, focusing on disclosure, default rules and safe harbors, and the right to withdraw from the transaction.

Keywords: contracts, consumer protection, behavioral economics, behavioral market failure, salience

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