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When a Nudge Isn’t Enough: Defaults and Saving Among Low-Income Tax Filers

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  • Erin Todd Bronchetti
  • Thomas S. Dee
  • David B. Huffman
  • Ellen Magenheim

Abstract

Recent evidence suggests that the default options implicit in economic choices (e.g., 401(k) savings by white-collar workers) have extraordinarily large effects on decision-making. This study presents a field experiment that evaluates the effect of defaults on savings among a highly policy-relevant population: low-income tax filers. In the control condition, tax filers could choose (i.e., opt in) to receive some of their federal tax refund in the form of U.S. Savings Bonds. In the treatment condition, a fraction of the tax refund was automatically directed to U.S. Savings Bonds unless tax filers actively chose another allocation. We find that the opt-out default had no impact on savings behavior. Furthermore, our treatment estimate is sufficiently precise to reject effects as small as one-fifth of the participation effects found in the 401(k) literature. Ancillary evidence suggests that this "nudge" was ineffective in part because the low-income tax filers in our study had targeted plans to spend their refunds. These results suggest that choice architecture based on defaults may be less effective in certain policy-relevant settings, particularly where intentions are strong.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16887.

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Date of creation: Mar 2011
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Publication status: published as “When a Nudge isn’t Enough: Defaults and Saving among Low - Income Tax Filers,” with Erin Bronchetti, David Huffman, and Ellen Magenheim, National Tax Journal 66(3), September 2013, 609 - 634.
Handle: RePEc:nbr:nberwo:16887

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  1. Esther Duflo & William Gale & Jeffrey Liebman & Peter Orszag & Emmanuel Saez, 2005. "Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block," NBER Working Papers 11680, National Bureau of Economic Research, Inc.
  2. James Choi & David Laibson & Brigitte Madrian & Andrew Metrick, 2003. "Passive Decisions and Potent Defaults," NBER Working Papers 9917, National Bureau of Economic Research, Inc.
  3. Raj Chetty & Emmanuel Saez, 2013. "Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients," American Economic Journal: Applied Economics, American Economic Association, American Economic Association, vol. 5(1), pages 1-31, January.
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Cited by:
  1. Carol Osler & Tanseli Savaser & Thang Tan Nguyen, 2012. "Asymetric Information and the Foreign-Exchange Trades of Global Custody Banks," Working Papers, Brandeis University, Department of Economics and International Businesss School 55, Brandeis University, Department of Economics and International Businesss School.
  2. B. Douglas Bernheim & Andrey Fradkin & Igor Popov, 2011. "The Welfare Economics of Default Options in 401(k) Plans," NBER Working Papers 17587, National Bureau of Economic Research, Inc.

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