Automatic payroll deduction plans, such as the popular 401(k) account in the U.S., represent one of the most effective means of increasing savings in developed countries. We designed and evaluated a mobile phone-based automatic payroll deduction system in Afghanistan, a country with limited formal financial infrastructure. Working with Afghanistan's largest telecommunications operator, we developed and launched a new mobile savings account, using a randomized control trial to concurrently evaluate 24 variants of a single basic account. Our results indicate that access to this account significantly increases the average employee's total savings.
Datalab FacultyJoshua Blumenstock
Michael Callen (Harvard) and Tarek Ghani (Princeton)
Automatic payroll deductions represent one of the most effective means of increasing savings in developed countries. We design and experimentally evaluate a mobile phone-based automatic payroll deduction system in Afghanistan, a country with limited formal financial infrastructure. We find that employees initially assigned a default contribution rate of 5 percent are 40 percentage points more likely to contribute to the account than individuals assigned to a default contribution rate of zero. We also randomize employer matches, and estimate that a 50% match would be required to replicate the default effect through financial incentives alone. To better understand why the default effect is so pronounced, we conduct several additional experimental interventions designed to induce employees to make a non-default selection, and use behavioral protocols to elicit measures of time inconsistency.
We conclude that the effect of default assignment is driven largely by dynamic inconsistency, and specifically the tendency to procrastinate over the task of finding an optimal plan.