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Geoffrey A. Manne headshot

President and Founder

Geoffrey A. Manne is president and founder of the International Center for Law and Economics (ICLE), a nonprofit, nonpartisan research center based in Portland, Oregon. He is also a distinguished fellow at Northwestern University’s Center on Law, Business, and Economics. Previously he taught at Lewis & Clark Law School. Prior to teaching, Manne practiced antitrust law at Latham & Watkins, clerked for Hon. Morris S. Arnold on the 8th Circuit Court of Appeals, and worked as a research assistant for Judge Richard Posner. He was also once (very briefly) employed by the FTC. Manne holds AB & JD degrees from the University of Chicago.

Kristian Stout headshot

Director of Innovation Policy

Kristian Stout, ICLE's Director of Innovation Policy is an expert in intellectual property, antitrust, telecommunications, and Internet governance. Kristian has been a Fellow at the Internet Law & Policy Foundry, as well as the Eagleton Institute of Politics. Before practicing law, Kristian worked as a technology entrepreneur and a lecturer in the Computer Science Department at Rutgers University.

Todd Zywicki headshot

Foundation Professor of Law
Antonin Scalia Law School at George Mason University

Todd J. Zywicki is George Mason University Foundation Professor of Law at George Mason University Antonin Scalia School of Law, Senior Fellow of the Cato Institute, and former Executive Director of the GMU Law and Economics Center.

Financial Regulation

Consumer Protection Corporate Governance Economics EU Financial Regulation First Amendment Payments & Payment Networks

ICLE White Paper

Behavioral Law & Economics Goes to Court: The Fundamental Flaws in the Behavioral Economics Arguments Against No-Surcharge Laws

Summary

During the past decade, academics—predominantly scholars of behavioral law and economics—have increasingly turned to the claimed insights of behavioral economics in order to craft novel policy proposals in many fields, most significantly consumer credit regulation. Over the same period, these ideas have also gained traction with policymakers, resulting in a variety of legislative efforts, such as the creation of the Consumer Financial Protection Bureau.

In 2016 the issue reached the Supreme Court, which granted certiorari in Expressions Hair Design v. New York for the October 2016 term. The case, which centers on a decades-old New York state law that prohibits merchants from imposing surcharge fees for credit card purchases, represents the first major effort to ground constitutional law (here, First Amendment law) in the claims of behavioral economics.

In this article we examine the merits of that effort. Claims about the real-world application of behavioral economic theories should not be uncritically accepted— especially when advanced to challenge a state’s commercial regulation on constitutional grounds. And courts should be especially careful before relying on such claims where the available evidence fails to support them, where the underlying theories are so poorly developed that they have actually been employed elsewhere to support precisely opposite arguments, and where alternative theories grounded in more traditional economic reasoning are consistent with both the history of the challenged laws and the evidence of actual consumer behavior. The Petitioners in the case (five New York businesses) and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: namely, that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech (and not a permissible regulation of conduct). Assessing the merits of the underlying economic arguments (but not the ultimate First Amendment claim), we conclude that, in this case, neither the behavioral economic

The Petitioners in the case (five New York businesses) and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: namely, that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech (and not a permissible regulation of conduct). Assessing the merits of the underlying economic arguments (but not the ultimate First Amendment claim), we conclude that, in this case, neither the behavioral economic

Assessing the merits of the underlying economic arguments (but not the ultimate First Amendment claim), we conclude that, in this case, neither the behavioral economic theory, nor the evidence adduced to support it, justifies the Petitioners’ claims. The indeterminacy of the behavioral economics underlying the claims makes for a behavioral law and economics “just-so story”—an unsupported hypothesis about the relative effect of surcharges and discounts on consumer behavior adduced to achieve a desired legal result, but that happens to lack any empirical support. And not only does the evidence not support the contention that consumer welfare is increased by permitting card surcharge fees, it strongly suggests that, in fact, consumer welfare would be harmed by such fees, as they expose consumers to potential opportunistic holdup and rent extraction.

As far as we know, this is the first time the Supreme Court has been expressly asked to consider arguments rooted in behavioral law and economics in reaching its decision. It should decline the offer.