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Mobile-izing savings with automatic contributions: experimental evidence on dynamic inconsistency and the default effect in Afghanistan

Callen, Mike, Blumenstock, Joshua E. and Ghani, Tarek (2016) Mobile-izing savings with automatic contributions: experimental evidence on dynamic inconsistency and the default effect in Afghanistan. IPA Working Papers. Innovations for Poverty Action, New Haven, CT.

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Abstract

Through a field experiment in Afghanistan, we show that default enrollment in payroll deductions increases rates of savings by 40 percentage points, and that this increase is driven by present-biased preferences. Working with Afghanistan’s primary mobile phone operator, we designed and deployed a new mobile phone-based automatic payroll deduction system. Each of 967 employees at the country’s largest firm was randomly assigned a default contribution rate (either 0% or 5%) as well as a matching incentive rate (0%, 25%, or 50%). We find that employees initially assigned a default contribution rate of 5% are 40 percentage points more likely to contribute to the account 6 months later than individuals assigned to a default contribution rate of zero; to achieve this effect through financial incentives alone would require a 50% match from the employer. We also find evidence of habit formation: default enrollment increases the likelihood that employees continue to save after the trial ended, and increases employees’ self-reported interest in saving and sense of financial security. To understand why default enrollment increases participation, we conducted several interventions designed to induce employees to make a non-default election, and separately measured employee time preferences. Ruling out several competing explanations, we find evidence that the default effect is driven largely by present-biased preferences that cause the employee to procrastinate in making a non-default election.

Item Type: Monograph (Working Paper)
Official URL: https://www.poverty-action.org/publications
Additional Information: © 2016 Innovations for Poverty Action
Divisions: Economics
Subjects: H Social Sciences > HG Finance
B Philosophy. Psychology. Religion > BF Psychology
Date Deposited: 10 Jan 2020 15:30
Last Modified: 24 Aug 2020 23:06
URI: http://eprints.lse.ac.uk/id/eprint/103037

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