Optimal Defaults and Active Decisions

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Optimal Defaults and Active Decisions

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Title: Optimal Defaults and Active Decisions
Author: Carroll, Gabriel D.; Choi, James J.; Laibson, David I.; Madrian, Brigitte; Metrick, Andrew

Note: Order does not necessarily reflect citation order of authors.

Citation: Carroll, Gabriel D., James J. Choi, David I. Laibson, Brigitte Madrian, and Andrew Metrick. 2009. Optimal defaults and active decisions. Quarterly Journal of Economics 124(4): 1639-1674.
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Abstract: Defaults often have a large influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make an explicit choice 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 30 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 non-enrollment), 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.
Published Version: doi:10.1162/qjec.2009.124.4.1639
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:4686776
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