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

A common justification for recent interventions in consumer markets which ban or require particular contract terms or require firms to disclose information is that consumers are imperfectly informed respecting the transactions they make. It is generally recognized, however, that information is never perfect, and that the decision-maker's task is therefore to characterize, in terms of the need for intervention, real world states intermediate between perfect information and perfect ignorance. These decisions are now made in what can politely be described as an impressionistic fashion because lawyers have no rigorous tools for 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 almost inaccessible to lawyers because of their mathematical complexity. It is our aim in this paper to communicate to lawyers the insights relevant to law reform provided by the new "economics of information.