Hofmann, Anett
(2014)
Commitment savings products: theory and evidence.
PhD thesis, London School of Economics and Political Science.
Abstract
Recent literature promotes commitment products as a new remedy for overcoming self-control problems and savings constraints. This thesis argues that the effects
of commitment may be very heterogeneous, and highlights the mechanisms under which commitment may reduce welfare, rather than increase it. It also examines a new type of commitment contract: A formal commitment savings account with fixed regular instalments, introduced in a developing-country context.
Chapter 1 proposes that the popularity of costly or inflexible savings mechanisms as well as of high-interest consumption loans may represent a demand for commitment to fixed instalments. Using a newly collected dataset from Bangladesh, it shows that the introduction of a regular-instalment commitment savings product was associated with a large increase in average savings contributions.
The theoretical framework in Chapter 2 highlights the potential heterogeneity behind such positive average effects: Commitment improves welfare when agents
have full knowledge of their preferences, including biases and inconsistencies. If agents are imperfectly informed about their preferences, they may choose ill-suited commitment contracts. I formally show that commitment contracts can reduce welfare if the commitment is not strong enough to discipline the agent, resulting in costly default. I further show that such insufficient commitment contracts are likely to be selected by time-inconsistent agents with ‘partially sophisticated’
preferences: Agents who are neither completely unaware nor fully aware of their time-inconsistency, but anywhere in between those two extremes.
Chapter 3 describes a randomised experiment in the Philippines: I designed and introduced a regular-instalment commitment savings product, intended to improve on pure withdrawal-restriction products by mimicking the fixed-instalment nature of loan repayment contracts. Individuals from a general low-income pop ulation were randomly offered to take up the product, and were asked to choose the stakes of the contract (in the form of a default penalty) themselves. The result
is that a majority appears to choose a harmful contract: While the intent-to-treat effect on bank savings for individuals assigned to the treatment group is four times
that of a withdrawal-restriction product (offered as a control treatment), 55 percent of clients default on their savings contract. The explanation most strongly supported by the data is that the chosen stakes were too low (the commitment was too weak) to overcome clients’ self-control problems. Moreover, both take-up and default are negatively predicted by measures of sophisticated hyperbolic discounting, suggesting that those who are fully aware of their bias realise the commitment is
too weak for them, and avoid the product. The study suggests that research on new commitment products should carefully consider the risk of adverse welfare effects,
particularly for naïve and partially sophisticated hyperbolic discounters.
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