When commitment fails: evidence from a field experiment

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2 Citations (Scopus)

Abstract

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 installmentsavings 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.

Original languageEnglish
Pages (from-to)503-529
Number of pages27
JournalManagement Science
Volume66
Issue number2
Early online date12 Jun 2019
DOIs
Publication statusPublished - Feb 2020

Keywords

  • Commitment
  • Hyperbolic discounting
  • Partial sophistication

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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