ASFEE 6 in Paris

When Commitment Fails - Evidence from a Regular Saver Product in the Philippines
Anett John  1, 2@  
1 : Centre de Recherche en Économie et Statistique  (CREST)  -  Website
INSEE, École Nationale de la Statistique et de l'Administration Économique
2 : École Nationale de la Statistique et de l'Administration Économique  (ENSAE)
ENSAE ParisTech
3, avenue Pierre Larousse 92245 MALAKOFF Cedex -  France

Commitment products are widely regarded as a remedy for self-control problems. However, imperfect knowledge about one's preferences implies that individuals may fail to anticipate their behaviour under commitment, and consequently choose ill-suited commitment contracts. I conduct a randomised experiment in the Philippines, where low-income individuals were randomly offered a regular-instalment commitment savings product. Individuals chose the stakes of the contract (a default penalty) themselves. A majority appears to choose a harmful contract: While the intent-to-treat effect on individuals' bank savings is large, 55 percent of clients default on their savings contract. A possible explanation that is supported by the data is that the chosen stakes were too low (the commitment was too weak) to overcome clients' self-control problems. Both take-up and default are negatively predicted by measures of sophisticated hyperbolic discounting - suggesting that partial sophisticates adopt weak commitments and then default, while full sophisticates are more cautious about committing, but better able to choose incentive-compatible contracts.

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