Russell B. Korobkin

Bounded Rationality, Standard Form Contracts, and Unconscionability

Economic theory suggests that, in most circumstances, market forces will ensure that stan-dard form contracts contain terms that are not only socially efficient but also beneficial to non-drafting parties as a class compared to other possible combinations of price and terms. This analy-sis in turn suggests that courts should enforce all form terms or, at a minimum, all form terms that non-drafting parties read and understand. Relying on social science research on decisionmaking, this Article argues that non-drafting parties (usually buyers) are boundedly rational decisionmak-ers who will normally price only a limited number of product attributes as part of their purchase decision. When contract terms are not among these attributes, drafting parties will have a market incentive to include terms in their standard forms that favor themselves, whether or not such terms are efficient. Thus, there is no a priori reason to assume form contract terms will be efficient. The Article then argues that the proper policy response to this conclusion is greater use of mandatory contract terms and judicial modification of the unconscionability doctrine to better respond to the primary cause of contractual inefficiency.

Wrestling with the Endowment Effect, or How to Do Law and Economics Without the Coase Theorem

This chapter, written for the forthcoming Oxford Handbook of Behavioral Economics and the Law, describes the endowment effect, with attention not only to what we know about it, but also what remains unclear about both its scope and its underlying causal mechanism, and demonstrates the importance of the effect to the normative analysis of a wide-range of substantive legal issues.Part I presents the core empirical findings concerning the endowment effect and critically evaluates recent claims that the effect might be an artifact of poor experimental design. Part II evaluates the evidence for several highly-contested interpretations of what psychological process or processes cause the endowment effect. Part III considers examining how the endowment effect might bear on positive and normative issues in four broad categories of law: the initial assignment of entitlements, the potential reassignment of entitlements, the facilitation of private transfers of entitlements, and the protection of entitlements through the judicial system. This part demonstrates that, used cautiously and judiciously, evidence of the endowment effect has the potential to sharpen normative legal policy analysis, but also that this enterprise is complicated and fraught with peril.

The Borat Problem in Negotiation: Fraud, Assent, and the Behavioral Law and Economics of Standard Form Contracts

Two parties reach an oral agreement. The first then presents a standard form contract, which the second signs without reading, or without reading carefully. When the second party later objects that the first did not perform according to the oral representations, the first party points out that the signed document includes different terms or disclaims prior representations and promises. I call this alltoo-common occurrence the “Borat Problem,” after litigation presenting this fact pattern that followed the 2006 movie of that name.

Relative Value Health Insurance: The Behavioral Law and Economics Solution to the Health Care Cost Crisis

With the Patient Protection and Affordable Care Act (ACA) set to sharply increase access to medical care, the problem of rising costs moves center stage in health law and policy discussions. “Consumer directed health care” proposals, which provide patients with financial incentives to equate marginal costs and benefits of care at the point of treatment, demand more decision making ability from boundedly-rational consumers than is plausible. Proposals that seek to change the incentives of health care providers threaten to create conflicts of interest between doctors and patients. New approaches are desperately needed.This article proposes a government-facilitated but market-based approach to improving efficiency in the private market for medical care that I call “relative value health insurance.” This approach focuses on the “choice architecture” necessary to enable even boundedly-rational patients to contract for the efficient level of health care services through their health insurance purchase decisions. It relies on using comparative effectiveness research, which the ACA funds at a significant level for the first time, to rate medical treatments on a scale of 1-10 based on their relative value, taking into account costs and expected benefits. These relative value ratings would enable consumers to contract with insurers for different levels of medical care at different prices, reflecting different cost-quality tradeoffs. The article describes both the benefits of the approach and the impediments to its implementation. It concludes with a brief discussion of how the principles can also be applied to public health insurance programs.