Rethinking Nudge: an Information-Costs Theory of Default Rules

Policy makers and scholars—both lawyers and economists—have long pon-dered the optimal design of default rules. From the classic works on “mimicking”defaults for contracts and corporations to the modern rush to set “sticky” defaultrules to promote policies as diverse as organ donation, retirement savings, consumerprotection, and data privacy, the optimal design of default rules has featured as acentral regulatory challenge. The key element driving the design is opt-out costs—how to minimize them, or, alternatively, how to raise them to make the default sticky.Much of the literature has focused on “mechanical” opt-out costs—the effort peopleincur to select a nondefault alternative. This focus is too narrow.

A more importantfactor affecting opt-out is information—the knowledge people must acquire to makeinformed opt-out decisions. But, unlike high mechanical costs, high informationcosts need not make defaults stickier; they may instead make the defaults “slippery.”This counterintuitive claim is due to the phenomenon of uninformed opt-out, whichwe identify and characterize. Indeed, the importance of uninformed opt-out requiresa reassessment of the conventional wisdom about Nudge and asymmetric or liber-tarian paternalism. We also show that different defaults provide different incentivesto acquire the information necessary for informed opt-out.

With the ballooning useof default rules as a policy tool, our information-costs theory provides valuable guid-ance to policy makers.