Soft versus Hard Commitments: A Test on Savings Behaviors

21 Pages Posted: 10 Aug 2014

See all articles by Jeremy Burke

Jeremy Burke

Center for Economic and Social Research (CESR)

Jill Luoto

RAND Corporation

Francisco Pérez-Arce

Center for Economic and Social Research (CESR)

Date Written: July 8, 2014

Abstract

Many Americans save too little, leaving them vulnerable to unexpected financial shocks. Finding ways to help Americans develop emergency savings funds could greatly improve welfare. A wealth of previous literature has demonstrated the central roles played by patience and self-control in achieving sufficient savings. When people lack patience or self-control, well-designed interventions may help improve financial stability. Increasingly, interventions intended to improve savings behavior have taken the form of externally restricted accounts such as ‘commitment accounts’ that include hefty fees for early withdrawal or that disallow withdrawals altogether for a pre-specified time. Yet, such hard commitment accounts may not appeal to impatient individuals, those who do not anticipate their own self-control problems, or to the poor for whom restrictions on scarce funds can be particularly painful. We test a new ‘soft’ commitment account that asks borrowers to think about their savings goals, how it would feel to achieve them, and make a pledge to work towards these goals (potentially increasing one’s intrinsic motivation), yet has no external restrictions on savings behavior. In a six-month randomized savings experiment we find that such soft commitments can significantly increase amounts saved on day one relative to either a hard commitment account (with external restrictions on withdrawals) or a traditional savings account. Additionally, the soft commitments significantly increased final savings balances relative to no form of commitment and were particularly effective for impatient individuals. However, despite the inherent illiquidity, the hard commitment account proved most effective in building savings balances amongst our participants at the end of six months.

Suggested Citation

Burke, Jeremy and Luoto, Jill and Perez-Arce, Francisco, Soft versus Hard Commitments: A Test on Savings Behaviors (July 8, 2014). RAND Working Paper Series WR-1055, Available at SSRN: https://ssrn.com/abstract=2477954 or http://dx.doi.org/10.2139/ssrn.2477954

Jeremy Burke (Contact Author)

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

Jill Luoto

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Francisco Perez-Arce

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

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

Paper statistics

Downloads
106
Abstract Views
938
rank
345,170
PlumX Metrics