Can Partial Commitment Increase Pension Contribution? A Field Experiment in Sri Lanka

We conduct several randomized controlled trials in more than 200 villages in Sri Lanka to study whether incentives and partial commitment pension designs generate higher participation and savings in the micro pension. In Experiment I, individuals are randomly assigned to a control group, a free installment group, and a matching group. We find that a free installment for the first month contribution increases the pension participation from 8 percentage points to 34 percentage points, and increases the pension contribution by 4 times.  A 100% matching for the first month contribution also increases the participation and contributions, but the effect is smaller. We show that the results can be explained by that free Installment group attracts more present bias agents, and present bias agents are more likely to participate in the pension when they do not need to pay first month contribution. In Experiment II, we further compare a full commitment pension including only one commitment account with a partial commitment pension contract including a liquid account and a commitment account. Individuals are randomly assigned to four groups: full commitment pension with high withdraw penalty, partial commitment pension with low withdraw penalty, partial commitment pension with high withdraw penalty, and a choice group in which they choose full commitment or partial commitment with high withdraw penalty. We find that, partial commitment pension with high withdraw penalty and the choice group have 9.9 percentage points and 7.7 percentage points more participation compared to full commitment pension, respectively. We show that high commitment contract attracts more sophisticated agents, and higher degree of commitment increase the pension participation more for sophisticated agents. These results are consistent with the theory of optimal illiquidity.