No returns allowed!

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The size of the informal economy in Bolivia is one of the largest in the world. According to the commonly used indicator produced by Schneider (2010), the size of Bolivia’s informal economy in 2005 reached an amazing 67 percent! That is, 67 percent of Bolivia’s GDP in 2005 was generated in the informal/shadow economy where no taxes are paid and no formal rules apply. [For comparison, the size of the informal economy in the U.S. during the same year was only 8 percent.]

What is sold in Bolivia’s informal economy? Mostly imported goods. Bolivia does not produce much more than natural gas, minerals and some agricultural products; everything else is imported and sold in informal markets. If you need to buy clothing, appliances, tools, cleaning products, furniture, electronics, construction material and even cars, there is a 67 percent probability that you will be buying those goods in informal “ferias” or flea markets. But careful, by the very nature of these markets, any type of warranties on those goods are meaningless. If the toaster you bought doesn’t toast, you are out of luck. You don’t have the right to return a product that you bought in an informal market to a merchant that brought it illegally (avoiding customs) into the country. Everybody knows that and Bolivians have gotten used to doing this type of “unprotected trade” for many years now.

Why do Bolivians put up with unprotected trade? Because the products are sold at incredibly low prices. Informal importers/merchants do not invest in big facilities or fancy stores, they do not train personnel on the technical details of the products, they do not offer insurance or other benefits to their workers, no custom duties or sale taxes are paid and, of course, no warranties are offered. All of those savings translate into more profits for the merchants and lower prices for the customers.

It was surprising, therefore, to read that the Bolivian government has just passed a law requiring merchants to offer warranties and accept product returns if these are defected. The new law is being promoted by the government agency responsible for “protecting consumers’ rights.” Really? Can such a law be enforceable in a country in which 67 percent of the economy happens in markets precisely characterized by the lack of formal rules? If it is enforceable, what are the unintended consequences? The obvious one is that prices will go up. Sellers will have to protect themselves against the risk of product returns. Will customers like to trade the possibility of returns for higher prices?

This is just another example of how seemingly well intentioned laws create unintended consequences that may make them in the end Pareto contracting. Would the agency responsible for protecting consumers’ rights be really protecting these rights if it, unintentionally, makes the goods more expensive?

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