Optimal Defaults with Normative Ambiguity

39 Pages Posted: 5 Jan 2017 Last revised: 5 Aug 2017

See all articles by Jacob Goldin

Jacob Goldin

Stanford Law School

Daniel Reck

London School of Economics & Political Science (LSE)

Date Written: August 1, 2017

Abstract

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

Goldin, Jacob and Reck, Daniel, Optimal Defaults with Normative Ambiguity (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=2893302 or http://dx.doi.org/10.2139/ssrn.2893302

Jacob Goldin

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

Daniel Reck (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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