When Commitment Fails: Evidence from a Field Experiment

Commitment products can remedy self-control problems. However, imperfect knowledge about their preferences may (discontinuously) lead individuals to select into incentive-incompatible commitments, which reduce their welfare. I conducted a field experiment in which low-income individuals were randomly offered a new installment-savings commitment account. Individuals chose a personalized savings plan and a default penalty themselves. A majority appears to choose a harmful contract: While the average effect on bank savings is large, 55% of clients default and incur monetary losses. A possible explanation is that the chosen penalties were too low (the commitment was too weak) to overcome clients’ self-control problems. Measures of sophisticated hyperbolic discounting correlate negatively with take-up and default, and positively with penalty choices. This finding is consistent with theoretical predictions that partial sophisticates adopt weak commitments and then default, whereas full sophisticates are more cautious about committing, but better able to choose incentive-compatible contracts.