New Commitment Devices Jon Zinman Dartmouth College (joint work with Dean Karlan) AEA 2010

Terms of Engagement Commitment and commitment device can mean many things Here, arrangements that: –Voluntarily restrict a consumers future choice set by changing prices –Are taken primarily with aim of changing ones own future behavior (goal attainment) –Are not taken strategically to influence the behavior of others

Quick Motivation Commitment contract for smoking cessation (Gine, Karlan, and Zinman 2010): –Committed Action to Reduce Smoking = CARES –Smoker posts money with bank (= contract provider) –Bank administers urine test after 6 months –Smoker gets money back if passes, forfeits money (to charity) otherwise Large intention to treat effects: offering the contract increases quit likelihood by 3-4pp (40%) –This effect persists in surprise tests 6 months later

Motivation: Some Puzzles in CARES Results Given large treatment effects, why is takeup rate only 11%? Among takers, why is success rate only 34%? Some explanations have little to do with commitment features –Learning about new product –Quit dynamics: trying to quit is itself a good And/or… sub-optimal features of the contract?

New Commitment Devices: Some Issues and Thoughts My approach –Issues with contract/program design –Thoughts on how to improve Caveat: all speculative –More theory needed –More empirics needed

Issue 1. Framing, Given Other Biases Commitment typically thought of as a solution to time-inconsistent preferences But what if people have other biases as well? –Limited awareness –Limited attention –Cued consumption (the Pavlov Problem) Also (wont talk about today): –Loss aversion –Projection bias –Exponential growth bias (how much would you save on cigs over lifetime if stopped smoking?)

Issue 1a. Limited Awareness Limited awareness of: Nature of self-control problem will depress takeup (naifs) Extent of self-control problem will lower success rate, conditional on takeup (partial sophisticates)

Issue 1a. Dealing with Limited Awareness Convert naifs, partial sophisticates into sophisticates? By providing information at signup: : Most people of your age, who smoke as much as you, require a stronger commitment to succeed. How about increasing $, or adding your spouse? By debiasing at signup: –Get people to think about past (failed) quit attempts –Have you considered a stronger commitment Provide stronger defaults re: contract terms? I.e., not clear that encouraging customization is optimal, even if there is consumer heterogeneity

Issue 1b. Limited Attention What we often think of as self-control problem may be inattention to future –Reminders for making savings deposits more effective for hyperbolics (Karlan, McConnell, Mullainathan, Zinman) A goal is not a plan –Psychologists find that people think more normatively, and not sufficiently instrumentally, about the future –(Delivering/discussing papers)

Issue 1b. Dealing with Limited Attention How convert daily struggle for commitment into a smaller set of key decisions? –Auto-enroll –Buy a patch Solutions here: –Process commitment (wealth habit: commit to sign up; commit to wear patch) –Bundle with reminders

Issue 1c. Dealing with Cues Debiasing and planning at takeup? –Are there situations that make you want to smoke? How do you plan to deal with those situations? –Have you thought about how you might avoid those situations? Smart defaults based on intake questions? –Would you like to make another commitment to [not smoke at work]?

Issue 2. Substitutes or Complements? Can commitment make standard treatments more effective? –Nicotine replacement therapy –(Financial planning/counseling)

Issue 3. Building a Mass Market Market providers: tension between over-the-counter approach and binding enforcement. –How well do self-reports or peer-reports work? –I.e., how costly is it to lie, or get your friend to lie, to the intermediary? Large employers may have strong incentives: commitment better health lower insurance costs, higher productivity? Focus so far on health, with bonuses rather than commitment contracts (Volpp et al) –Expand to financial health? (Carrell and Zinman) –Possible that commitment is even more effective than conditional cash transfers? Due to loss aversion

Summary Preliminary evidence that commitment devices can be a useful tool Preliminary evidence that weve only scratched the surface on optimal: –Design –Framing –Bundling More R&D needed –Interplay between theory and fieldwork