Working Paper: NBER ID: w11074
Authors: Gabriel D. Carroll; James J. Choi; David Laibson; Brigitte Madrian; Andrew Metrick
Abstract: Defaults can have a dramatic influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make an explicit choice for themselves. We study such "active decisions" in the context of 401(k) saving. We find that compelling new hires to make active decisions about 401(k) enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt-in enrollment procedure, producing a savings distribution three months after hire that would take three years to achieve under standard enrollment. We also present a model of 401(k) enrollment and characterize the optimal enrollment regime. Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences that are highly heterogeneous. Naive beliefs about future time-inconsistency strengthen the normative appeal of the active-decision enrollment regime. However, financial illiteracy favors default enrollment over active decision enrollment.
Keywords: 401k; active decisions; defaults; savings behavior; enrollment mechanisms
JEL Codes: D0; E21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| active decision mechanisms (D91) | 401k enrollment rates (G52) |
| active decision mechanisms (D91) | savings distribution (D14) |
| active decision mechanisms (D91) | decision-making process speed (D91) |
| 401k enrollment rates (G52) | savings rates (D14) |
| active decision mechanisms (D91) | savings rates (D14) |
| naive beliefs about future time-inconsistency (D15) | preference for active decision enrollment (D91) |
| financial illiteracy (G53) | preference for default enrollment (G52) |