Burke, Luoto and Perez-Arce (2014) on Soft and Hard Commitments

Jeremy Burke, Jill E. Luoto and Francisco Perez-Arce, “Soft versus Hard Commitments: A Test on Savings Behaviors [pdf].” RAND Labor & Population WR-1055, July 2014.

• One approach to increase savings is to offer people “commitment accounts,” which make it hard to withdraw funds and which might even result in losses if the saver does not live up to her commitments. It is commonplace for most people to turn down the opportunity to enter into commitment savings accounts. 

• This paper looks at a softer approach, where people are given a convenient way to save money, and are encouraged to do so, but without any commitment. The idea is that more people will find such accounts attractive, perhaps raising total savings relative to both commitment accounts and the status quo. 

• An online experiment is conducted with US subjects who indicated that they wanted to save more. They know they will be given $50, $100, or $500 (usually $50!), which they can receive after a brief delay, or they can save some or all of the money over the subsequent six months. Before they know which amount they are given, they are asked to make decisions regarding saving the different amounts at an annualized interest rate of 30%. 

• The savings options are not the same for everyone, however. Rather, the subjects are randomly selected to either the control – a standard savings account with no withdrawal restrictions – or to a soft or a hard account. The hard account allows no withdrawals until the six months have passed; the soft account is like the control, except that subjects receive subtle, active suggestions to save. Irrespective of the account they are selected for, the vast majority of subjects save some of their experimental windfall. Nonetheless, take-up is highest for the soft account, and the amount initially saved also is highest for the soft account – including among the most impatient savers. 

• After six months, the soft account leads to higher savings than does the control account. Nonetheless, as money is withdrawn from the soft accounts over the six months, the hard account leads to even higher total savings at the end of six months.