Passive Decisions and Potent Defaults / James Choi, David Laibson, Brigitte Madrian, Andrew Metrick.

By:

Choi, James

Contributor(s):

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w9917.Publication details: Cambridge, Mass. National Bureau of Economic Research 2003.Description: 1 online resource: illustrations (black and white)Subject(s):

D1 - Household Behavior and Family Economics

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Abstract: Default options have an enormous impact on household choices.' Defaults matter because opting out of a default is costly and these costs change over time, generating an option value of waiting. In addition, people have a tendency to procrastinate. We develop a theory of optimal defaults based on these considerations. We find that it is sometimes optimal to set extreme defaults, which are far away from the mean optimal savings rate. A default that is far away from a consumer's optimal savings rate may make that consumer better off since such a bad' default will lead procrastinating consumers to more quickly opt out of the default. We calibrate our model and use it to calculate optimal defaults for employees at four different companies. Our work suggests that optimal defaults are likely to be at one of three savings rates: the minimum savings rate (i.e., 0%), the match threshold (typically 5% or 6%), or the maximal savings rate.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w9917 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w9914 The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market /	nber w9915 Disentangling Volatility from Jumps /	nber w9916 Capital Tax Incidence: Fisherian Impressions from the Time Series /	nber w9917 Passive Decisions and Potent Defaults /	nber w9918 Mothers' and Fathers' Labor Supply in Fragile Families: The Role of Child Health /	nber w9919 Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance /	nber w9920 The Case for Auctioning Countermeasures in the WTO /	Next

August 2003.

Default options have an enormous impact on household choices.' Defaults matter because opting out of a default is costly and these costs change over time, generating an option value of waiting. In addition, people have a tendency to procrastinate. We develop a theory of optimal defaults based on these considerations. We find that it is sometimes optimal to set extreme defaults, which are far away from the mean optimal savings rate. A default that is far away from a consumer's optimal savings rate may make that consumer better off since such a bad' default will lead procrastinating consumers to more quickly opt out of the default. We calibrate our model and use it to calculate optimal defaults for employees at four different companies. Our work suggests that optimal defaults are likely to be at one of three savings rates: the minimum savings rate (i.e., 0%), the match threshold (typically 5% or 6%), or the maximal savings rate.