Incentives and Information as Driving Forces of Default Effects

39 Pages Posted: 21 Sep 2013

See all articles by Steffen Altmann

Steffen Altmann

University of Copenhagen; IZA Institute of Labor Economics

Armin Falk

University of Bonn - Economic Science Area; briq - Institute on Behavior & Inequality

Andreas Grunewald

University of Bonn - Economic Science Area

Abstract

The behavioral relevance of non-binding default options is well established. While most research has focused on decision makers' responses to a given default, we argue that this individual decision making perspective is incomplete. Instead, a comprehensive understanding of the foundation of default effects requires taking account of the strategic interaction between default setters and decision makers. We provide a theoretical framework to analyze which default options arise in such interactions, and which defaults are more likely to affect behavior. The key drivers are the relative level of information of default setters and decision makers, and their alignment of interests. We show that default effects are more pronounced if interests of the default setter and decision makers are more closely aligned. Moreover, decision makers are more likely to follow default options the less they are privately informed about the relevant decision environment.In the second part of the paper we experimentally test the main predictions of the model. We report evidence that both the alignment of interests as well as the relative level of information are key determinants of default effects. An important policy relevant conclusion is that potential distortions arising from default options are unlikely if decision makers are either well-informed or reflect on the interests of default setters.

Keywords: default options, libertarian paternalism, behavioral economics, incentives, laboratory experiment

JEL Classification: D03, D18, D83, C92

Suggested Citation

Altmann, Steffen and Falk, Armin and Grunewald, Andreas, Incentives and Information as Driving Forces of Default Effects. IZA Discussion Paper No. 7610, Available at SSRN: https://ssrn.com/abstract=2329060

Steffen Altmann (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Armin Falk

University of Bonn - Economic Science Area ( email )

briq - Institute on Behavior & Inequality

Schaumburg-Lippe-Straße 5-9
Bonn, 53113
Germany

HOME PAGE: http://www.briq-institute.org/

Andreas Grunewald

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany

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