Disclosure vs. Bans: Reply to Robin Hanson

A lit­tle while back I wrote a post ar­gu­ing that the ex­is­tence of abu­sive terms in credit card con­tracts (such as huge jumps in in­ter­est rates for be­ing one day late with a pay­ment) do not satisfy the con­di­tions for stan­dard eco­nomic mod­els of asym­met­ric in­for­ma­tion be­tween ra­tio­nal agents, but rather are trick­ery, pure and sim­ple. If this is right, then the stan­dard rem­edy of man­dat­ing the pro­vi­sion of more in­for­ma­tion to the less-in­formed party, but not oth­er­wise in­terfer­ing in the mar­ket (the idea be­ing that any vol­un­tary agree­ment must make both par­ties bet­ter off, no mat­ter how strange or one-sided the terms may ap­pear, so any in­terfer­ence in con­tracts be­yond pro­vid­ing in­for­ma­tion will re­duce welfare), is not the right one. There is no de­cent ar­gu­ment that those terms would ap­pear in any con­tract where both par­ties knew what they were do­ing, so if you see terms like that, the ap­pro­pri­ate con­clu­sion is that some­one has been screwed, not that God­dess of Cap­i­tal­ism, in her in­finite-but-in­scrutable wis­dom, has un­cov­ered the only terms that, strange as they may seem to mere mor­tals, make a mu­tu­ally benefi­cial con­tract pos­si­ble. The goal is to get rid of those terms, and the most di­rect way to do that is sim­ply to pro­hibit them. There are some good rea­sons to be re­luc­tant to have the gov­ern­ment go around pro­hibit­ing things, so manda­tory dis­clo­sure might still be a good policy (though the Fed­eral Re­serve has in­ves­ti­gated this and con­cluded that it isn’t), but the goal would be to use the dis­clo­sures to elimi­nate the abu­sive terms. There is no jus­tifi­ca­tion for the stan­dard economist’s ag­nos­ti­cism about whether the terms are good or not: they’re bad and the only ques­tion is how best to get rid of them.

Robin Han­son left some com­ments to that post, in which he made the point that since peo­ple vol­un­tar­ily choose these terms, they must like them and so pro­hibit­ing them would have to mean pro­tect­ing peo­ple against their will. I an­swered that while I’m enough of a pa­ter­nal­ist to be will­ing, un­der some cir­cum­stances, to im­pose limited pro­tec­tions on peo­ple even if those peo­ple would op­pose them, that I didn’t think that was an is­sue here, as I would guess (though I have no proof), that the Fed­eral Re­serve’s re­cent de­ci­sion to ban cer­tain credit card prac­tices was prob­a­bly very pop­u­lar, even (es­pe­cially?) among the peo­ple who are harmed by those prac­tices. Robin’s re­ply, as I un­der­stand it, is that this may be true, but since peo­ple can’t si­mul­ta­neously want to ac­cept credit cards with those terms and at the same time fa­vor ban­ning those terms, it must be the case that they ei­ther don’t un­der­stand the terms of the credit card con­tracts or they don’t un­der­stand the effects of the ban. Some­where there must just be some miss­ing in­for­ma­tion, and there­fore we must be back where we started, with the prob­lem be­ing a lack of in­for­ma­tion that could be re­solved by pro­vid­ing more in­for­ma­tion.

So I take Robin to be say­ing that bans such as those in­sti­tuted by the Fed can­not be shown to be non-co­er­cive to credit card cus­tomers sim­ply by re­course to the hy­poth­e­sized “fact” that the bans are pop­u­lar, be­cause any­one who vol­un­tar­ily chooses those terms and also sup­ports the ban must be be­ing in­con­sis­tent some­how. He also seems to be say­ing that this in­con­sis­tency means that we’re just back in the world of stan­dard eco­nomic mod­els where one side is ig­no­rant.

On the sec­ond point, ei­ther I am mi­s­un­der­stand­ing Robin or I think he’s sim­ply wrong. As I un­der­stand them, stan­dard mod­els of asym­met­ric in­for­ma­tion do not re­sult in the ig­no­rant party just get­ting screwed. Rather, they re­sult in oth­er­wise benefi­cial ex­changes not hap­pen­ing, or in the terms be­ing dis­torted in ways that come from the fact that one party is not in­formed (Robin, let me know if I mi­s­un­der­stand you or if you dis­agree). So even if ev­ery­thing else Robin says is right, it’s still not the case that we’re in a world where the prob­lem is plain-vanilla asym­met­ric in­for­ma­tion, and where the solu­tion is clearly to provide more in­for­ma­tion but not to ban. Robin might ar­gue that peo­ple are in fact get­ting screwed but that the cure of ban­ning is worse than the dis­ease, but I don’t see how he can ar­gue that the cen­tral prob­lem here is asym­met­ric in­for­ma­tion.

As for the first point, a cou­ple of com­menters pointed out that the in­con­sis­tency of prefer­ences that Robin points to are not more ir­ra­tional than the kinds of prefer­ences that we see peo­ple have all the time. I think they’re right about this, but I think there’s a more di­rect way to square the ap­par­ent in­con­sis­tency. Peo­ple to­day “vol­un­tar­ily” ac­cept those pro­vi­sions be­cause that’s the way to get a credit card. In the world as it cur­rently ex­ists, it’s those terms or noth­ing (with the limited ex­cep­tion of cards is­sued by credit unions and the like, which avoid such trick­ery)* and so peo­ple “choose” those terms. But they’d be hap­pier in a world whether the equil­ibrium credit card terms are bet­ter, and they would pre­fer to be able to “choose” those. I don’t want to over­state this point, as I think what’s re­ally go­ing on is that peo­ple are badly con­fused and also (jus­tifi­ably) hos­tile to credit card com­pa­nies. But there is a perfectly sound story in which peo­ple would choose the terms and also ap­prove of the ban.

BTW, for a neat ex­am­ple of how peo­ple trick and make no bones about the fact that that’s what they’re do­ing, see here.

*I would be very in­ter­ested to know what frac­tion of peo­ple who have ac­cess to such al­ter­na­tives use them.