Incentives and Information as Driving Forces of Default Effects

Steffen Altmann, Armin Falk and Andreas Grunewald ()
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Andreas Grunewald: Goethe University Frankfurt

No 7610, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The behavioral relevance of non-binding default options is well established. While most research has focused on decision makers' responses to a given default, we argue that this individual decision making perspective is incomplete. Instead, a comprehensive understanding of the foundation of default effects requires taking account of the strategic interaction between default setters and decision makers. We provide a theoretical framework to analyze which default options arise in such interactions, and which defaults are more likely to affect behavior. The key drivers are the relative level of information of default setters and decision makers, and their alignment of interests. We show that default effects are more pronounced if interests of the default setter and decision makers are more closely aligned. Moreover, decision makers are more likely to follow default options the less they are privately informed about the relevant decision environment. In the second part of the paper we experimentally test the main predictions of the model. We report evidence that both the alignment of interests as well as the relative level of information are key determinants of default effects. An important policy relevant conclusion is that potential distortions arising from default options are unlikely if decision makers are either well-informed or reflect on the interests of default setters.

Keywords: libertarian paternalism; behavioral economics; incentives; default options; laboratory experiment (search for similar items in EconPapers)
JEL-codes: C92 D03 D18 D83 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2013-09
New Economics Papers: this item is included in nep-cbe, nep-cdm, nep-cta, nep-exp and nep-hrm
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Citations: View citations in EconPapers (18)

Published - substantially revised version forthcoming in: Review of Economics and Statistics

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Working Paper: Incentives and Information as Driving Forces of Default Effects (2015)
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