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Becher & Zarsky on Rights to Withdraw from Contracts

By Lawrence Solum

Shmuel I. Becher (College of Management) & Tal Zarsky (University of Haifa - Faculty of Law) have posted Open Doors, Trap Doors and the Law (Law and Contemporary Problems, Forthcoming) on SSRN. Here is the abstract:

Common wisdom teaches us to strive to keep our options open, and to the greatest extent. We are advised by mentors and peers to re-examine constantly decisions and offers and to seek out new ones, without losing sight and control of the old. This general preference can be articulated in various contexts through legalistic terminology. In this Article we focus on the context of consumer contract law, applying the term "Open Door" to refer to situations in which a consumer can exercise, within a well defined time frame, a right to rescind or withdraw from - and thus reverse - a contractual commitment.

Intuitively, leaving doors open makes perfect sense. This intuition could also be phrased in economic terms as an appropriate measure to minimize risk and effectively gather information. However, in many cases this line of reasoning is wrong. Lenient return policies providing for an Open Door might lead consumers to systematically misperceive the transaction at stake due to behavioral and cognitive biases. Thus, the Open Door can lead people to engage in sub-optimal transactions, or to purchase products they need not buy.

Additionally, the Open Door may send inaccurate signals, leading to market distortions. Therefore, keeping doors open might not be the optimal strategy that assures efficiency, wealth maximization and happiness. Employing an interdisciplinary approach, we demonstrate that the intuitive desire to leave doors open has far-reaching, diverse, and at times contradictory psychological, economic, and legal implications.

Full post as published by Legal Theory Blog on August 09, 2010 (boomark / email).