Daniel Reck, London School of Economics

Optimal Defaults with Normative Ambiguity.

Abstract

A large and growing literature suggests that decision-makers are more likely to select options presented to them as the default. Numerous decision-making models can potentially explain the presence of default effects. However, such models differ in their implications for the link between choices and welfare, and are difficult to distinguish empirically. In this paper, we study how alternative explanations for default effects shape conclusions about optimal policy. We utilize a simple and general framework that nests most models of default effects that have been described in the literature. The model parameterizes the degree to which default effects arise due to a welfare-relevant preference versus a mistake on the part of decision-makers. When this parameter is unknown – a situation we refer to as normative ambiguity – determining the optimal default is often impossible. We apply this framework to data on 401(k) plan contributions and find that the optimal policy is to promote active choices when less than 6 to 9 percent of employees’ revealed opt-out costs (about $120 to $180) are welfare-relevant, and otherwise to minimize opt-outs.

Daniel Reck received his PhD in Economics from the University of Michigan, after which he spend a year as a Post-Doctoral scholar at the University of California Berkley’s department of economics.

He is currently an Assistant Professor of Economics at the London School of Economics. He conducts research on topics such as behavioral welfare economics and public economics.