On Tuesday the House takes its first step toward reforming the Dodd-Frank Act when the Financial Services Committee marks-up Chairman Jeb Hensarling’s Financial Choice Act. One surprisingly contentious provision of Mr. Hensarling’s bill—dividing even Republicans usually suspicious of price controls—is also one that could do the most good for small businesses and American consumers: repeal of the so-called Durbin Amendment.

Read the full piece here.

Summary

Introduced as part of the Dodd-Frank Act in 2010, the Durbin Amendment — named after its main sponsor, Senator Richard Durbin — sought to reduce the interchange fees assessed by large banks on each debit card transaction. The Durbin Amendment was hailed by proponents as a victory for merchants and consumers. In the words of Sen. Durbin, the Amendment aspired to help “every single Main Street business that accepts debit cards keep more of their money, which is a savings they can pass on to their consumers.”

In a 2014 analysis, we found that although the Durbin Amendment had generated benefits for largebox retailers, it had harmed many other merchants, especially those specializing in small-ticket items, and imposed substantial net costs on the majority of consumers, especially those from lower-income households.

In this study, we find that the passage of time has not ameliorated the harm to bank customers from the Durbin Amendment; to the contrary, earlier adverse trends have solidified or worsened. Nor do we find any indication that matters have improved for small merchants or retail consumers: Although large merchants continue to reap a Durbin Amendment windfall, there remains no evidence that small merchants have realized any cost savings — indeed, many have suffered cost increases. Nor is there any evidence that merchants have lowered prices for retail consumers; for many small-ticket items, in fact, prices have been driven up.

Finally, we identify a new trend that was not apparent when we examined the data three years ago: Contrary to our findings then, the two-tier system of interchange fee regulation (which exempts issuing banks with under $10 billion in assets) no longer appears to be protecting smaller banks from the Durbin Amendment’s adverse effects.

In sum:

• The evidence presented in this paper contradicts the claim that the costs resulting from the Durbin Amendment have been offset by merchants charging lower prices. Indeed, the majority of consumers — and especially those with lower incomes — have experienced higher prices overall.
• Millions of households, regardless of income level, have been adversely affected by the Durbin Amendment through higher costs for bank accounts and related services. Most troublingly, this has hit lower-income households the hardest. Hundreds of thousands of low-income households have chosen (or been forced) to exit the banking system, with the result that they face higher costs, difficulty obtaining credit, and complications receiving and making payments.
• That a forced reduction in interchange fees would result in higher bank fees for consumers is a matter of basic economics. Retail banking in the United States is a highly competitive industry and there is no evidence of supra-normal profitability for retail banks. As such and over time, cost increases or revenue reductions will be passed on to bank customers in the form of higher bank fees or reduced services. It was simply inevitable that the removal of billions of dollars in interchange fee revenue would ultimately result in higher costs for bank
  consumers.
• For some higher-income households the costs are likely mitigated by their ability to avoid checking account fees and to switch to credit cards. For both lower-income and higher-income households these costs may have been further offset, to some extent, by slightly lower prices at some merchants. But for lower-income households in particular, these possible offsets are either inaccessible or too small to make much difference. For them the Durbin Amendment has, on net, unequivocally imposed more costs than benefits.
• The Durbin Amendment has also served to increase costs for some smaller retailers and sellers of small-ticket items. Among those most adversely affected have been grocery stores, fast food outlets and similar establishments, a significant proportion of which have raised prices since the Amendment was implemented. Again, these effects hit low-income households the hardest.

In short, our findings in this report echo and reinforce our findings from 2014: Relative to the period before the Durbin Amendment, almost every segment of the interrelated retail, banking and consumer finance markets has been made worse off as a result of it. The Durbin Amendment appears on net to be hurting consumers and small businesses, especially low-income consumers, while providing little but speculative benefits to anyone but large retailers. Moreover, the regulation is starting to affect community banks and credit unions, as well, which can little afford the loss of revenue.

The Durbin experiment has proven a failure, and the price caps that it imposed should be removed.

Read full paper here or a fact sheet of the report’s findings.

In a recent long-form article in the New York Times, reporter Noam Scheiber set out to detail some of the ways Uber (and similar companies, but mainly Uber) are engaged in “an extraordinary experiment in behavioral science to subtly entice an independent work force to maximize its growth.”

Read the full piece here. 

What does it mean to “own” something? A simple question (with a complicated answer, of course) that, astonishingly, goes unasked in a recent article in the Pennsylvania Law Review entitled, What We Buy When We “Buy Now,” by Aaron Perzanowski and Chris Hoofnagle (hereafter “P&H”). But how can we reasonably answer the question they pose without first trying to understand the nature of property interests?

Read the full piece here.

My colleague, Neil Turkewitz, begins his fine post for Fair Use Week (read: crashing Fair Use Week) by noting that

Many of the organizations celebrating fair use would have you believe, because it suits their analysis, that copyright protection and the public interest are diametrically opposed. This is merely a rhetorical device, and is a complete fallacy.

If I weren’t a recovering law professor, I would just end there: that about sums it up, and “the rest is commentary,” as they say. Alas…

Read the full piece here. 

So I’ve just finished writing a book (hence my long hiatus from Truth on the Market).  Now that the draft is out of my hands and with the publisher (Cambridge University Press), I figured it’s a good time to rejoin my colleagues here at TOTM.  To get back into the swing of things, I’m planning to produce a series of posts describing my new book, which may be of interest to a number of TOTM readers.  I’ll get things started today with a brief overview of the project.

Read the full piece here.

Behavioral economics has taken the academy by storm over the past two decades. The Obama administration has even looked to the discipline—which posits that psychological biases frequently lead consumers to make bad economic decisions—to shape government policy. But is behavioral economics relevant to interpreting the Constitution? That’s the novel claim raised by Expressions Hair Design v. Schneiderman, which the Supreme Court will hear Tuesday.

Read the full piece here.

Summary

It’s hardly an overstatement to claim that data is (or is fast becoming) the lifeblood of the modern economy. As new business models built on innovative uses of data emerge in the economy, these businesses are confronted with increasing regulatory constraints that may work to limit both the scope of their operation as well as their corporate structure.

Nominally in the name of consumer protection, largely in response to foreign government surveillance threats, but also significantly as a form of protectionism, many countries
around the world have adopted various and differing data localization laws — what Chander and Le aptly call “data nationalism” — that either preclude or make more difficult the removal of data from a particular country.

Multinational data platforms (e.g., search engines, product review sites, electronic payment services (including credit cards), data brokers, and the like) that process data in a central location and/or that combine data across borders in order to improve their predictive algorithms are particularly affected by such rules.

Regulatory and legal approaches that make the collection and use of data more expensive along certain dimensions must, at least marginally, induce some companies to alter their behavior to avoid those costs and, consequently, to eschew potentially more beneficial business arrangements in favor of ones that correlate with lower regulatory risk, lower regulatory cost, and/or greater regulatory predictability. “However, regulation often influences behavior in ways that differ from the initially stated rationale.” By disrupting organizational structures designed to work with data, firms will respond to these regulations not only by altering their data collection and use practices, but also the organizational structures that complement them.

Data (information) regulation (as opposed to other types of regulation) is particularly likely to affect institutional structure. As Luis Garicano notes:

Organizations exist, to a large extent, to solve coordination problems in the presence of specialization. As Hayek pointed out, each individual is able to acquire knowledge about a narrow range of problems. Coordinating this disparate knowledge, deciding who learns what, and matching the problems confronted with those who can solve them are some of the most prominent issues with which economic organization must deal.

Regulations that affect how firms can collect, store, use and disseminate information may
thus have significant effect on firm governance and organization.

Faced with costly regulations, firms engage in something akin to regulatory arbitrage. They face a tradeoff between incurring (or reducing) regulatory costs on the one hand, and increasing transaction costs on the other and, when regulatory costs are high enough relative to transaction costs, will rationally choose the latter over the former:

[Firms] face a tension between reducing regulatory costs on the one hand and increasing Coasean transaction costs on the other. Deal lawyers routinely depart from the optimal transaction-cost-minimizing structure even though restructuring the deal reduces its (nonregulatory) efficiency. A corporation that needs cash might minimize transaction costs by entering into a secured loan, but instead, in order to improve the cosmetics of the balance sheet, enters into an economically similar transaction to securitize the assets. A company that would minimize agency costs by incorporating in Delaware decides that, to save on taxes, it will instead incorporate in Bermuda. So long as the regulatory savings outweigh the increase in transaction costs, such planning is perfectly rational.

Unlike the theory of regulatory arbitrage, however, what I am suggesting here is not simply that firms exploit imperfectly drafted laws and regulations in order to opt-in to more preferable legal regimes (although that is certainly part of it). Instead, I am also suggesting that firms will structure their businesses in part to minimize the impact of legal rules, even where they still apply.

While many data and related privacy regulations are nominally aimed at consumer protection, efforts to avoid stricter consumer protection per se, in order to “exploit” consumers may not be the primary or even significant impetus behind firms’ efforts to arbitrage such rules. Instead they may be driven more significantly by efforts to evade the broader consequences of such laws for how their businesses innovate and experiment, what business models they employ, and how they are structured.

A related point is that effective use of data often (always?) requires implementation of complementary organizational structures. Rules affecting the collection and use of data may under-appreciate the inter-relatedness of data (technology) and its internal implementation (organization), such that their enactment and enforcement will engender not just technological responses, but organizational ones, as well.

Regulation imposes costs and rational actors seek to avoid those costs. But the situation here isn’t binary. Sometimes, when parties avoid costs, they merely seek to avoid a higher expense, and substitute for something more affordable — a substitution that is, by definition,
a second-best (or worse) outcome.

This dynamic could manifest itself as companies simply choosing to collect and use less data, but it could mean a lot of other things as well. It could affect corporate organization (e.g., deterring vertical integration or creating “data firewalls” between different divisions of a company), encourage limits on the geographic scope of data collection or operation, affect the mechanisms for determining executive compensation, or (further) encourage jurisdictional considerations to dictate incorporation and principal place of business
decisions. While choosing second-best options is rational from the perspective of regulated parties, it is nevertheless costly to society, both in terms of the firm’s efficient operation relative to its operation in a viable alternative regulatory regime and to consumer welfare generally.

Data regulations may also deter entry, thereby indirectly affecting business and organizational decisions of incumbent firms in the market.

Such consequences are often unobserved and unintended. The hypothesis presented here is that the actions of over-eager regulatory agencies will have a host of unintended effects not just on data use directly, but on how firms are organized, how business is done, and on corporate governance more broadly. The goal of this project is to discover and elucidate as much of this unseen ground as possible, and to determine the extent to which particular information regulation rules affect these outcomes.

 

Summary

Petitioners base their First Amendment argument on two premises: first, that surcharges are “more effective” than discounts at altering consumer behavior; and second, that surcharges and discounts are economically equivalent except for their labels. Under this view, because the only difference between discounts and surcharges is how they are framed, it must be this framing that leads to the difference in consumers’ responses. To explain why Petitioners believe this is true—and, thus, to maintain their claim that New York’s surcharge prohibition is an impermissible restriction on speech—Petitioners and their amici rely on the behavioral economic concepts of “framing” and “loss aversion.” They claim that the State impermissibly wishes to prohibit surcharging because these cognitive biases render surcharge labels more effective than discount labels in altering consumers’ preferred form of payment.

Petitioners’ premises are wrong. There is no sound evidence that the asserted behavioral theories are at work here, or that credit-card surcharging— much less the mere label used to describe the practice—more greatly affects consumers’ chosen method of payment than cash discounting. In fact, some of the studies on which Petitioners and their amici rely suggest the opposite. The Court should not rely, in the absence of sound supporting evidence, on a malleable theory that can be used to support contradictory positions.

Moreover, surcharges and discounts differ in material ways beyond the words used to describe them. Surcharging—but not discounting—enables merchants to engage in certain pricing and sales practices that explain both consumers’ different responses to them, as well as the State’s interest in regulating them differently. And while petitioners lack empirical support for the behavioral claims at the heart of their First Amendment argument, the evidence from countries that permit surcharging reveals that merchants often use surcharges to engage in these types of pricing practices. This Court should thus reject Petitioners’ invitation to base constitutional doctrine on a behavioral hypothesis unsupported by any sound empirical evidence—especially where, as here, that result could potentially expose consumers to the type of conduct that the State’s law seeks to prevent.