Abstract
We study the effect of incorporating heterogeneity into default rules by examining the choice between retirement plans at a firm that transitioned from a defined benefit (DB) to a defined contribution (DC) plan. The default plan for existing employees varied discontinuously depending on their age. Employing regression discontinuity techniques, we find that the default increased the probability of enrollment in the default plan by 60 percentage points. We develop a framework to solve for the optimal default rule analytically and numerically and find that considerable welfare gains are possible if defaults vary by observable characteristics.
- Accepted February 2012.
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- Article
- Abstract
- I. Introduction
- II. Background and Related Literature
- III. Causal Effect of Default on Plan Enrollment
- IV. Solving for the Optimal Age-Based Default Rule
- V. Numerical Simulations of the Optimal Age-Based Default Rule
- VI. Conclusion
- Appendix 1 Robustness to Choice of Bandwidth
- Appendix 2 Monte Carlo Simulations
- Footnotes
- References
- Figures & Data
- Info & Metrics
- References