Self Control and Liquidity: How to Design a Commitment Contract

59 Pages Posted: 10 Dec 2011

See all articles by John Beshears

John Beshears

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

James J. Choi

Yale School of Management; National Bureau of Economic Research (NBER)

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Brigitte C. Madrian

Brigham Young University Marriott School of Business; National Bureau of Economic Research (NBER)

Jung Sakong

Federal Reserve Bank of Chicago

Date Written: November 8, 2011

Abstract

If individuals have self-control problems that lead them to spend money when they had previously planned to save it, they may take up financial commitment devices that restrict their future ability to access their funds. The authors experimentally investigate how the demand for commitment contracts is affected by contract design features. In their experiments, each subject is endowed with a sum of money and asked to divide that money between a liquid account, which permits unrestricted withdrawals at any time over the course of the months-long experiment, and one or more commitment accounts, which impose withdrawal penalties or restrictions. The design features of the liquid account are the same for all subjects, but the design features of the commitment account(s) are randomized across subjects. When the interest rates on the two types of accounts are the same, they find that allocations to a commitment account are higher when the account is less liquid. The commitment account that disallows early withdrawals altogether attracts the largest allocations. However, this relationship no longer holds when the commitment account interest rate is greater than the liquid account interest rate.

Suggested Citation

Beshears, John and Choi, James J. and Laibson, David I. and Madrian, Brigitte C. and Sakong, Jung, Self Control and Liquidity: How to Design a Commitment Contract (November 8, 2011). RAND Working Paper Series WR- 895-SSA, Available at SSRN: https://ssrn.com/abstract=1970039 or http://dx.doi.org/10.2139/ssrn.1970039

John Beshears (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James J. Choi

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David I. Laibson

Harvard University - Department of Economics ( email )

Littauer Center
Room M-14
Cambridge, MA 02138
United States
617-496-3402 (Phone)
617-495-8570 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brigitte C. Madrian

Brigham Young University Marriott School of Business ( email )

Provo, UT 84602
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jung Sakong

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
264
Abstract Views
1,314
rank
189,650
PlumX Metrics