Optimal Defaults with Normative Ambiguity
39 Pages Posted: 5 Jan 2017 Last revised: 5 Aug 2017
Date Written: August 1, 2017
A large and growing literature shows that decision-makers are more likely to select options presented to them as the default. We study the optimal choice of defaults. Our model assumes that decision-makers behave as if there is some cost to selecting any option that is not the default. These “as-if” opt-out costs may or may not be normative -- i.e., they may or may not enter into the planner’s social welfare function. The model parameterizes the degree to which as if costs are normative, and in doing so nests a large number of models of default effects from the literature. With this model, we characterize the optimal default. Our results suggest that in many situations, determining the optimal policy will not be possible without judgments concerning the normative relevance of behavioral frictions. When as-if costs are not normative, optimal policies tend to encourage active choices. When as-if costs are normative, the optimal policy tends to minimize opt-outs. We apply this framework to study default contributions to pension plans, and find that the optimal policy differs dramatically based on the share of opt-out costs that are normative.
Keywords: defaults, optimal policy, revealed preference, behavioral welfare economics
JEL Classification: D60, H00, I30
Suggested Citation: Suggested Citation