Journal
QUARTERLY JOURNAL OF ECONOMICS
Volume 124, Issue 4, Pages 1639-1674Publisher
OXFORD UNIV PRESS INC
DOI: 10.1162/qjec.2009.124.4.1639
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Funding
- NIA NIH HHS [T32 AG000186-16, R01 AG021650-06, R29 AG013020-05, R01 AG016605-03, T32 AG000186, R01 AG021650] Funding Source: Medline
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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.
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