(Mis)perceptions of Law in Consumer Markets

Abstract

There are good reasons to believe that consumers’ behavior is sometimes influenced by systematic misperceptions of legal norms that govern product quality. Consumers might misperceive specific rules, such as those found in food safety regulations, as well as more general standards, such as the unconscionability doctrine or limitations on waivers of default substantive or procedural rights. When demand is affected by systematic misperceptions of legal norms, lawmakers may be able to maximize welfare by deviating from the legal standard that would be optimal in the absence of misperception. We use a formal model to characterize these optimal deviations under different legal regimes (with different types and magnitudes of sanctions). In particular, should the legal standard be adjusted to counteract or confirm the misperception? For instance, if consumers underestimate the level of legal protection is it desirable to raise the legal standard to counteract the misperception? Or should lawmakers lower the legal standard to confirm the misperception?