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Consumer biases and mutual ownership

  • Bubb, Ryan
  • Kaufman, Alex
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    We show how ownership of the firm by its customers, as well as nonprofit status, can prevent firms from using contractual terms that take advantage of consumer biases. By eliminating an outside residual claimant with control over the firm, these alternatives to investor ownership reduce the incentive of the firm to offer such terms. However, customers who are unaware of their behavioral biases may fail to recognize this advantage of non-investor-owned firms. We present evidence from the consumer financial services market that supports our theory. Comparing contract terms, we find that mutually owned firms offer lower penalties, such as default interest rates, and higher up-front prices, such as introductory interest rates, than do investor-owned firms. However, consumers most vulnerable to these penalties are no more likely to use mutually owned firms.

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    Article provided by Elsevier in its journal Journal of Public Economics.

    Volume (Year): 105 (2013)
    Issue (Month): C ()
    Pages: 39-57

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    Handle: RePEc:eee:pubeco:v:105:y:2013:i:c:p:39-57
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