|This centre is a member of The LSE Research Laboratory [RLAB]: CASE | CVER | CEP | FMG | SERC | STICERD||Cookies?|
Anett John (née Hofmann),
Paper revised 30 October 2015
Paper No' EOPP 055: | Full paper
Save Reference as: BibTeX File | EndNote Import File
Keywords: commitment savings, hyperbolic discounting, partial sophistication
JEL Classification: C93; D03; D14; O12
Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: Economic Organisation and Public Policy Discussion Papers
Share this page: Google Bookmarks | Facebook | Twitter
Abstract:Commitment products are widely regarded as a remedy for self-control problems. However, imperfect knowledge about one's preferences implies that individuals may fail to anticipate their behaviour under commitment, and consequently choose ill-suited commitment contracts. I conduct a randomised experiment in the Philippines, where low-income individuals were randomly offered a regular-instalment commitment savings product. Individuals chose the stakes of the contract (a default penalty) themselves. A majority appears to choose a harmful contract: While the intent-to-treat effect on individuals' bank savings is large, 55 percent of clients default on their savings contract. A possible explanation that is supported by the data is that the chosen stakes were too low (the commitment was too weak) to overcome clients' self-control problems. Both take-up and default are negatively predicted by measures of sophisticated hyperbolic discounting - suggesting that partial sophisticates adopt weak commitments and then default, while full sophisticates are more cautious about committing, but better able to choose incentive-compatible contracts.
Copyright © STICERD & LSE 2005 - 2021 | LSE, Houghton Street, London WC2A 2AE | Tel: +44(0)20 7955 6699 | Email: email@example.com | Site updated 28 November 2021