Optimal Defaults and Active Decisions

Gabriel D. Carroll, James Jinwoo Choi, David Laibson (), Brigitte C. Madrian and Andrew Metrick ()

No 11074, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D0 E21 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-mac
Date: 2005-01
Note: AG LS PE
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