University of Pennsylvania Journal of Business Law

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Consumers rarely understand contracts offered by sellers. It does not make sense for consumers to invest in understanding these contracts because they are typically complex, time and attention are limited, and the value at stake is often low. Because consumers don’t understand contracts and information sharing among consumers is costly, sellers can profit by drafting contracts that harm consumers more than they benefit sellers. Sellers who would like to offer efficient contracts face competitive pressures not to do so because consumers who do not understand contracts cannot appreciate the benefits. Ideally, contracts would be simpler and easier to understand, but regulators don’t know the optimal complexity for each contract. Sellers know the value of the contract, but do not internalize the costs of complexity. To the contrary, sellers can benefit from making contracts more complex than necessary to obscure anti-consumer terms.

This article proposes a new solution to this famous problem: a tax that sellers would pay to present a contract to consumers, coupled with a subsidy to consumers who comprehend contracts and share information. The tax would be proportionate to the cost consumers would incur if they invested in comprehending the contract. It would be assessed whenever sellers presented a contract, regardless of whether or not consumers signed. We show that this tax and subsidy solution would cause sellers to make their contracts simpler to reduce their own tax burdens. Thus, sellers would internalize the comprehension costs that they can currently impose on consumers. We demonstrate that sellers can be compelled to forego strategic obfuscation if this tax is paired with a subsidy to encourage consumer comprehension and information sharing. This tax and subsidy pairing would penalize inefficient contracts while minimizing the burden on efficient contracts. Inefficient contracts would thereby become financially unsustainable.