Optimal Defaults and Active Decisions
Name
Carroll-2009-OPTIMAL DEFAULTS AND ACTIVE DECISIONS.pdf
Size
443.78 KB
Format
Adobe PDF
Checksum (MD5)
644f730effbd9a48111d1a203a085853
Author(s)
Carroll, Gabriel Drew
Choi, James J.
Laibson, David
Madrian, Brigitte C.
Metrick, Andrew
Alternative Title
OPTIMAL DEFAULTS AND ACTIVE DECISIONS
Date Issued
November 2009
Journal
Quarterly Journal of Economics
Publisher
MIT Press
Citation
Carroll, Gabriel D. et al. “Optimal Defaults and Active Decisions*.” Quarterly Journal of Economics 124.4 (2009): 1639-1674. ©2009 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Version
Final published version
Abstract
Defaults often have a large influence on consumer decisions. We identify an
overlooked but practical alternative to defaults: requiring individuals to make explicit
choices 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 thirty 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 nonenrollment), 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.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
Persistent DSpace Link
DOI of Published Version
http://dx.doi.org/10.1162/qjec.2009.124.4.1639
https://doi.org/10.1162/qjec.2009.124.4.1639
