When Commitment Fails - Evidence from a Regular Saver Product in the Philippines

Recent literature promotes commitment products as a new remedy for overcoming self-control problems and savings constraints. Committing to a welfare-improving contract requires knowledge about one's preferences, including biases and inconsistencies. If agents are imperfectly informed about their preferences, they may choose ill-suited commitment contracts. I designed a regular-instalment commitment savings product, intended to improve on pure withdrawal-restriction products by mimicking the fixed-instalment nature of loan repayment contracts. I conduct a randomised experiment in the Philippines, where individuals from a general low-income population were randomly offered to take up the product. Individuals chose the stakes of the contract (in the form of a default penalty) themselves. The result is that a majority appears to choose a harmful contract: While the intent-to-treat effect on bank savings for individuals assigned to the treatment group is four times that of a withdrawal-restriction product (offered as a control treatment), 55 percent of clients default on their savings contract. The explanation most strongly supported by the data is that the chosen stakes were too low (the commitment was too weak) to overcome clients' self-control problems. Moreover, both take-up and default are negatively predicted by measures of sophisticated hyperbolic discounting, suggesting that those who are fully aware of their bias realise the commitment is too weak for them, and avoid the product. The study suggests that research on new commitment products should carefully consider the risk of adverse welfare effects, particularly for naïve and partially sophisticated hyperbolic discounters.