Self Control and Commitment: Can Decreasing the Liquidity of a Savings Account Increase Deposits?

55 Pages Posted: 25 Aug 2015 Last revised: 8 Sep 2015

See all articles by John Beshears

John Beshears

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

James J. Choi

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

Christopher Harris

University of Cambridge - Department of Applied Economics

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

University of Chicago - Booth School of Business

Date Written: August 2015

Abstract

If individuals have self-control problems, they may take up commitment contracts that restrict their spending. We experimentally investigate how contract design affects the demand for commitment contracts. Each participant divides money between a liquid account, which permits unrestricted withdrawals, and a commitment account with withdrawal restrictions that are randomized across participants. When the two accounts pay the same interest rate, the most illiquid commitment account attracts more money than any of the other commitment accounts. We show theoretically that this pattern is consistent with the presence of sophisticated present-biased agents, who prefer more illiquid commitment accounts even if they are subject to uninsurable marginal utility shocks drawn from a broad class of distributions. When the commitment account pays a higher interest rate than the liquid account, the relationship between illiquidity and deposits is flat, suggesting that agents without present bias and/or naïve present-biased agents are also present in our sample.

Suggested Citation

Beshears, John and Choi, James J. and Harris, Christopher J. and Laibson, David I. and Madrian, Brigitte C. and Sakong, Jung, Self Control and Commitment: Can Decreasing the Liquidity of a Savings Account Increase Deposits? (August 2015). NBER Working Paper No. w21474. Available at SSRN: https://ssrn.com/abstract=2649743

John Beshears (Contact Author)

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James J. Choi

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David I. Laibson

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Brigitte C. Madrian

Brigham Young University Marriott School of Business ( email )

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Jung Sakong

University of Chicago - Booth School of Business ( email )

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