Do Behavioral Frictions Prevent Firms from Adopting Profitable Opportunities?

Paul Gertler, Sean Higgins, Ulrike Malmendier and Waldo Ojeda

No 33387, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Firms frequently fail to adopt profitable business opportunities even when they do not face informational or liquidity constraints. We explore three behavioral frictions that explain inertia among individuals—present bias, limited memory, and distrust—in a managerial setting. In partnership with a FinTech payments company in Mexico, we randomly offer 33,978 firms the opportunity to pay a lower merchant fee. We vary whether the offer has a deadline, reminder, pre-announced reminder, and the size of the fee reduction. Reminders increase take-up by 15%, suggesting a role of memory. Announced reminders increase take-up by an additional 7%. Survey data reveal the likely mechanism: When the FinTech company follows through with the pre-announced reminder, firms' trust in the offer increases. The deadline does not affect larger firms, implying limited or no present bias, but does increase take-up by 8% for smaller firms. Overall, behavioral frictions contribute significantly to explaining profit-reducing firm behavior.

JEL-codes: D9 G4 M1 O14 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-exp, nep-pay and nep-sbm
Note: CF DEV PR
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