Working Paper: NBER ID: w16099
Authors: Gopi Shah Goda; Colleen Flaherty Manchester
Abstract: We study the effect of incorporating heterogeneity into default rules by examining the choice between retirement plans at a firm which transitioned from a defined benefit (DB) to a defined contribution (DC) plan. The default plan for existing employees varied discontinuously depending on their age. Employing regression discontinuity techniques, we find that the default increased the probability of enrollment in the default plan by 60 percentage points. We develop a framework to solve for the optimal default rule analytically and numerically and find that considerable welfare gains are possible if defaults vary by observable characteristics.
Keywords: Retirement Plans; Default Rules; Employee Heterogeneity
JEL Codes: H8; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Risk Aversion (D81) | Default Assignment (Y20) |
| Age (J14) | Default Assignment (Y20) |
| Default Assignment (Y20) | Enrollment Probability (C46) |
| Age (J14) | Enrollment Probability (C46) |
| Default Assignment (Y20) | Optimal Retirement Plan (J26) |