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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..

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

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

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Handle: RePEc:tpr:qjecon:v:124:y:2009:i:4:p:1639-1674
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