Focus Areas:    Behavioral Economics | Behavioral Law and Economics

The Constitution Says Nothing About Behavioral Economics

Wall Street Journal View Original

Excerpt

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.

The case involves New York’s ban on credit-card surcharges. For decades the state has barred companies from tacking on a fee when customers pay with plastic instead of cash. A hair salon now challenges that law, claiming businesses have a constitutional right to impose surcharges—and that behavioral economics provides the theoretical foundation.

At first glance this idea is puzzling. Congress originally prohibited credit-card surcharging in 1976, but that ban lapsed in 1984. In response, several states, including New York, enacted laws that mirrored, more or less, the federal prohibition. For decades these statutes were largely moot, since the contracts between card networks and merchants also barred surcharging. The dormant laws came back to life after a 2013 class-action settlement dropped that contractual language.

The hair salon’s argument starts with a 1974 federal law guaranteeing businesses a right to offer cash discounts. In one school of thought, this is functionally equivalent to a credit-card surcharge. The salon can already give customers, say, $1 off for paying in cash. So why does it want the ability to add a $1 surcharge for paying with credit? What’s the difference?

Enter behavioral economics. Although the two appear to be mathematically equivalent, the salon argues that surcharges are more effective at changing behavior because consumers suffer from a “loss aversion” bias. More customers will decide to pay with cash, the theory goes, if faced with a “loss” (the $1 surcharge) than a “gain” (the $1 discount).

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