Optimal Defaults and Active Decisions / Gabriel D. Carroll, James J. Choi, David Laibson, Brigitte Madrian, Andrew Metrick.

Format:

Book

Author/Creator:

Carroll, Gabriel D.

Contributor:

National Bureau of Economic Research.

Choi, James J.

Laibson, David.

Madrian, Brigitte.

Metrick, Andrew.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11074.

NBER working paper series no. w11074

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

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.

Notes:

Print version record

January 2005.