When Commitment Fails - Evidence from a Regular Saver Product in the Philippines

Anett John

STICERD - Economic Organisation and Public Policy Discussion Papers Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: Commitment products are widely regarded as a remedy for self-control problems. However, imperfect knowledge about one's preferences implies that individuals may fail to anticipate their behaviour under commitment, and consequently choose ill-suited commitment contracts. I conduct a randomised experiment in the Philippines, where low-income individuals were randomly offered a regular-instalment commitment savings product. Individuals chose the stakes of the contract (a default penalty) themselves. A majority appears to choose a harmful contract: While the intent-to-treat effect on individuals' bank savings is large, 55 percent of clients default on their savings contract. A possible explanation that is supported by the data is that the chosen stakes were too low (the commitment was too weak) to overcome clients' self-control problems. Both take-up and default are negatively predicted by measures of sophisticated hyperbolic discounting - suggesting that partial sophisticates adopt weak commitments and then default, while full sophisticates are more cautious about committing, but better able to choose incentive-compatible contracts.

Keywords: commitment savings; hyperbolic discounting; partial sophistication (search for similar items in EconPapers)
JEL-codes: C93 D03 D14 O12 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-exp, nep-mfd and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:cep:stieop:055

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