New Podcast Explores the Distributional Costs of Effective Consumer Regulation
Disclosure has long been one of the principal tools of consumer protection. The basic premise seems straightforward: if consumers are given better information about the terms of a transaction, they should be able to make better-informed decisions.
But what if better disclosure works differently for different consumers? And what if a disclosure that improves decision-making overall can, in some circumstances, actually worsen outcomes for financially vulnerable consumers?
Those are among the important and provocative questions explored in the latest episode released today of the Consumer Finance Monitor Podcast, hosted by Alan Kaplinsky (founder and former chair for 25 years and now Senior Counsel of the Consumer Financial Services Group at our firm) Alan’s guest is Professor Florencia Marotta-Wurgler of NYU School of Law, a leading scholar of consumer law, behavioral law and economics. We discuss her new article, “The Distributional Costs of Effective Consumer Regulation,” co-authored with Tamar Kricheli-Katz. The article is available for free on SSRN.
The article challenges the conventional way regulators and academics have evaluated consumer disclosures. Rather than simply asking whether disclosure “works,” the authors ask a more nuanced question: for whom does it work, under what circumstances, and at what cost?
Better disclosure can reduce mistakes, but not necessarily for everyone in the same way
The research is based on quasi-field experiments involving more than 3,000 participants and credit-card-style gift cards. The participants were presented with different disclosure formats, including expandable disclosures, traditional full disclosures, and what the authors describe as “salient” or behaviorally informed disclosures.
The results are fascinating.
Traditional disclosures, whether terms were placed behind an expandable hyperlink or presented in a block of text, were largely ineffective. Participants generally did not click through or read the lengthy disclosures. By contrast, simplified and salient disclosures that highlighted key terms did affect consumer behavior. That is good news for regulators who believe that carefully designed disclosures can improve consumer decision-making.
But there was an important second finding. When there was a single clearly superior product, salient disclosure helped consumers across income groups, and it particularly helped financially constrained consumers avoid mistakes. In that setting, better disclosure appeared to have an equalizing effect.
The results became much more complicated when consumers had to make a genuine trade-off.
When salience changes the trade-off
In one of the experiments, consumers could choose between receiving money immediately while paying a fee or waiting two weeks to receive the money without the fee. As the disclosure became more salient, consumers generally became less likely to choose the clearly inferior option.
But when the researchers separated consumers based on financial stress, they found something quite different. For financially stressed consumers, emphasizing the immediate availability of the money appeared to make the immediate payment particularly attractive—even when the associated fee was substantial. The researchers found evidence suggesting that the salient disclosure could activate what behavioral economists describe as a “scarcity mindset,” causing financially stressed consumers to focus more heavily on immediate needs and less on longer-term costs.
As Professor Marotta-Wurgler explained during the podcast, the important question is whether this behavior represents a perfectly rational response to an urgent need for cash or whether the disclosure itself is changing the consumer’s decision-making process.
The research cannot definitively answer that question. But the findings provide evidence that something important is happening and, in the authors’ view, warrants further study.
The implications for regulators
The research raises a fundamental issue for consumer protection policy.
Regulators understandably want disclosures to be more effective. If consumers don’t read lengthy disclosures, the obvious response is to make important information simpler, shorter and more salient.
But salience does more than merely convey information. As Professor Marotta-Wurgler explained, it can capture attention and “reframe” the way consumers think about the choices before them.
That means a seemingly neutral disclosure can have behavioral consequences that regulators may not anticipate.
This is an important distinction.
The question should not simply be whether a disclosure improves consumer decision-making on average. Regulators also should consider whether the disclosure changes the distribution of outcomes and, if so, how.
What does this mean for behavioral regulation?
The discussion also has broader implications for the growing use of behavioral economics in consumer financial regulation.
Behaviorally informed regulation often assumes that consumers can be nudged toward better decisions by changing the way information or choices are presented. The research discussed in the podcast suggests that such interventions can be powerful—but that power can cut both ways.
A nudge designed to improve consumer decision-making may have unintended consequences when consumers are experiencing financial stress.
That does not mean behavioral regulation should be abandoned. Instead, it suggests that regulators need to be more careful about evaluating behavioral interventions and should consider their distributional effects rather than looking only at aggregate outcomes.
A broader lesson about disclosure
One of the most interesting conclusions from the research is that it does not support the increasingly common assertion that disclosures simply don’t work.
They can work.
The problem is that their effects are not uniform.
As Alan summarized at the end of the podcast, three lessons stand out from the research:
- Disclosure matters. Contrary to the view that disclosures are inherently ineffective, making important information more salient can reduce consumer mistakes.
- The effects of disclosure can vary significantly among consumers. A disclosure that improves outcomes in one setting may produce very different behavioral responses among financially stressed consumers.
- Most importantly, regulators need to look beyond the question of whether disclosure works and ask for whom it works, under what psychological conditions, and at what potential equity cost.
The research also raises questions that extend well beyond gift cards. Professor Marotta-Wurgler and her colleagues are examining whether making non-core contractual terms, such as arbitration provisions, class-action waivers, late fees and automatic renewal provisions, more salient actually changes consumer behavior, and whether those effects differ among consumers. She is also pursuing research involving dynamic pricing and dominated contracts.
During the discussion, Professor Marita-Wurgler and Alan also briefly discussed the connection between this research and surveillance pricing, an area in which Professor Marotta-Wurgler is conducting additional research.
For anyone involved in consumer financial regulation, the podcast provides a thought-provoking examination of an issue that is likely to become increasingly important: Can consumer protection measures designed to help consumers actually produce unintended distributional consequences?
Professor Marotta-Wurgler’s research is particularly compelling because it challenges the assumption that making information more effective is necessarily an unqualified good. Sometimes, a disclosure may not merely inform consumers. It may change what they focus on, how they perceive trade-offs and ultimately what choices they make.
That is a lesson regulators, policymakers and industry participants should keep in mind as they design the next generation of consumer protection disclosure rules.
Listen to the episode below or click the link to listen on the firm’s website.