Essays in Behavioral Economics

Abstract

This dissertation presents three studies in behavioral economics, with a focus on factors that influence how individuals make financial decisions. Paper one examines the impact of the payday cycle on commitment decisions. Paper two studies what factors influence the choice to retain or yield decision-making power. Paper three is a field experiment that studies the effect of a federal earnings and savings program on household income. Each of these papers has implications for policymakers who are interested in promoting financial well-being in household finance.

Paper one is motivated by the fact that individuals often behave impatiently when making financial decisions, which can have long-term economic consequences. This paper proposes and tests that the timing of decisions relative to payday—which leads to strong cyclical fluctuations in liquidity for many individuals—influences the level of patience they have. In a large pre-registered online experiment, I ask participants to adopt a commitment device that binds them to being patient. Participants who make this decision eight days before their payday, rather than one day after payday, are 38% more likely to take up commitment. This is consistent with a mechanism where projection-biased agents have self-control problems. By documenting the importance of the timing of financial decisions relative to payday, this paper offers a new policy tool as well as new evidence on the behavioral dynamics that affect everyday savings and consumption choices.

Paper two studies the common policy problem that individuals reject recommended options and insist on making their own choices. Via a large-scale experiment, we document and investigate what factors contribute to this preference for agency. Our main results show that individuals' willingness to give up their agency increases when they are less determined about what they would choose. Additional results suggest that this is because when they are less determined about what they would choose, forgoing agency allows them to avoid making decisions.

Paper three investigates earnings incentives in public housing. For most people living in public housing, the cost of rent is tied to one's income, and therefore an increase in income leads to an increase in rent. This creates a disincentive towards earning more. I study a federal program that removes this disincentive by returning rent increases to residents in an escrow account. In partnership with the Cambridge Housing Authority (CHA), we automatically enroll some residents in public housing into this program and provide them with financial coaching through the Boston-based nonprofit Compass Working Capital. Using administrative data from all CHA residents, I use a set of quasi-experimental methodological approaches to estimate that enrollment into the program led to an increase of approximately $1,500 to $2,500 in gross annual household income, which represents a 6% to 9% overall increase.