IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Optimal Defaults and Active Decisions

  • Gabriel D. Carroll

    (Massachusetts Institute of Technology.)

  • James J. Choi

    (Yale University and National Bureau of Economic Research.)

  • David Laibson

    (Harvard University and National Bureau of Economic Research.)

  • Brigitte C. Madrian

    (Harvard University and National Bureau of Economic Research.)

  • Andrew Metrick

    (Yale University and National Bureau of Economic Research.)

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. (c) 2009 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/qjec.2009.124.4.1639
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 124 (2009)
Issue (Month): 4 (November)
Pages: 1639-1674

as
in new window

Handle: RePEc:tpr:qjecon:v:124:y:2009:i:4:p:1639-1674
Contact details of provider: Web page: http://mitpress.mit.edu/journals/

Order Information: Web: http://mitpress.mit.edu/journal-home.tcl?issn=00335533

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Mark J. Warshawsky & John Ameriks, . "How Prepared Are Americans for Retirement?," Pension Research Council Working Papers 98-11, Wharton School Pension Research Council, University of Pennsylvania.
  2. James J Choi & David Laibson & Brigitte C Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Levine's Working Paper Archive 122247000000002014, David K. Levine.
  3. Henrik Cronqvist & Richard H. Thaler, 2004. "Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience," American Economic Review, American Economic Association, vol. 94(2), pages 424-428, May.
  4. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," JCPR Working Papers 256, Northwestern University/University of Chicago Joint Center for Poverty Research.
  5. Gabriel D. Carroll & James J. Choi & David Laibson & Brigitte Madrian & Andrew Metrick, 2005. "Optimal Defaults and Active Decisions," NBER Working Papers 11074, National Bureau of Economic Research, Inc.
  6. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
  7. Richard H. Thaler & Cass R. Sunstein, 2003. "Libertarian Paternalism," American Economic Review, American Economic Association, vol. 93(2), pages 175-179, May.
  8. James J. Choi & David Laibson & Brigitte C. Madrian, 2011. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 748-763, August.
  9. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
  10. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  11. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  12. John Beshears & James Choi & David Laibson & Brigitte Madrian, 2008. "Simplification and Saving," Yale School of Management Working Papers amz2392, Yale School of Management.
  13. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc.
  14. Engen, Eric & Gale, William & Uccello, Cori, 1999. "The Adequacy of Household Saving," MPRA Paper 56442, University Library of Munich, Germany.
  15. Abadie, Alberto & Gay, Sebastien, 2004. "The Impact of Presumed Consent Legislation on Cadaveric Organ Donation: A Cross Country Study," Working Paper Series rwp04-024, Harvard University, John F. Kennedy School of Government.
  16. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
  17. Erik Hurst, 2004. "Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers," Working Papers wp088, University of Michigan, Michigan Retirement Research Center.
  18. Mark Aguiar & Erik Hurst, 2004. "Consumption vs. Expenditure," NBER Working Papers 10307, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tpr:qjecon:v:124:y:2009:i:4:p:1639-1674. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Pollock-Nelson)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.