Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis

Abstract

A common justification for recent judicial and legislative interventions in consumer markets to set contract terms or to require firms to disclose price or other product-related information is that consumers are imperfectly informed with respect to the transactions they make. It is generally recognized, however, that information is never perfect; the decisionmaker's task, therefore, is to characterize, in terms of the need for intervention, real world states that are intermediate between perfect information and perfect ignorance. These decisions are now made in what can be described politely as an impressionistic fashion, because lawyers have no rigorous tools for evaluating and responding to information problems. In recent years, economists have developed a variety of models that begin to explain the behavior of markets characterized by imperfect information. These models, however, have been of little practical use to most lawyers, judges, and legislators, because of their mathematical complexity. The goal of this Article is to communicate to lawyers and decisionmakers the legal implications of this new "economics of information."