Optimal Defaults and Active Decisions

Gabriel Carroll, James Choi, David Laibson, Brigitte Madrian and Andrew Metrick

Scholarly Articles from Harvard University Department of Economics

Abstract: Defaults often have a large 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 30 months to achieve under standard enrollment. We also present a model of 401(k) enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment (i.e., default enrollment), standard enrollment (i.e., default non-enrollment), or active decisions (i.e., no default and compulsory choice). Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous. Financial illiteracy, however, favors default enrollment over active decision enrollment.

Date: 2009
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Citations: View citations in EconPapers (223)

Published in Quarterly Journal of Economics -Cambridge Massachusetts-

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http://dash.harvard.edu/bitstream/handle/1/4686776/Laibson_OptimalDefaults.pdf (application/pdf)

Related works:
Journal Article: Optimal Defaults and Active Decisions (2009)
Working Paper: Optimal Defaults and Active Decisions (2005)
Working Paper: Optimal Defaults and Active Decisions (2005)
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