سرمایه گذاری و مشارکت تصمیم گیری در یک طرح بازنشستگی: تاثیر انتخاب همکاران

This paper investigates whether peer effects play an important role in retirement savings decisions. We use individual data from employees of a large university to study whether individual decisions to enroll in a Tax Deferred Account plan sponsored by the university, and the choice of the mutual fund vendor for people who choose to enroll, are affected by the decisions of other employees in the same department. To overcome the identification problems, we divide the departments into sub-groups (along gender, status, age, and tenure lines) and we instrument the average participation of each peer group by the salary or tenure structure in this group. Our results suggest that peer effects may be an important determinant of savings decisions

Low levels of savings in the United States have generated substantial interest in the question of what determines savings decisions. A vast literature has studied the impact of Tax Deferred Accounts (hereafter, TDA), such as Individual Retirement Accounts (IRAs) and 401(k)s, on retirement savings decisions,1 and, concurrently, the impact of these plans’ features on enrollment and contribution rates. A number of studies attempted to assess the effect of economic incentives on individual behavior and found mixed evidence. The presence of a matching contribution from the employer has generally been found to be correlated with higher participation rates, but the level of the match rate does not seem to matter.2 As Bernheim (1999) points out, matching also serves as a device to focus the employees’ attention. This suggests that pure economic incentives are not sufficient to explain savings behavior. Recent studies emphasize the role of non-economic factors, such as financial education and inertia. Madrian and Shea (2000a) show that default rules have an enormous impact on employees’ participation, contribution, and asset allocation. When they are enrolled by default in a TDA, very few employees opt out. Further, most employees do not change the default contribution rate or the default allocation of assets. Bernheim and Garrett (1996) and Bayer et al. (1996) study the role of financial education. They present evidence that financial education tends to be remedial3 but that it increases participation in the plan, suggesting that employees may not be able to gather the necessary information on their own. This paper contributes to this literature by studying the role of peer effects in TDA participation and decisions related to the plan. There has never been a study of peer effects on saving decisions. This is surprising, because the theoretical literature suggests at least two reasons why peers play a role in this context. First, the plans are sufficiently subtle that their advantages are not obvious to someone who has not thought carefully about it. Even when people choose to participate, they may lack the information necessary to make investment decisions. The evidence presented by Madrian and Shea (2000a) suggests that a large proportion of people do not think about these decisions at all. The literature on informational cascades (Bikhchandani et al., 1992, Banerjee, 1992 and Elison and Fudenberg, 1993) provide reasons why information (correct or not) obtained from co-workers may be an important factor in deciding whether to participate and how to invest — giving rise to peer effects. Second, savings decisions may be influenced by social norms or beliefs about social norms. By observing co-workers, people can learn about the proper behavior of their social group, as emphasized by models of conformity (e.g., Bernheim, 1994): individuals may want to maintain the same consumption level as what is common in their social group. There is a growing empirical literature on peer effects which essentially focuses on social behavior, and the adoption of new technologies.4Manski (1993) provides a formal exposition of the econometric issues involved in identifying peer effects. Correlation of behavior within peer groups is not necessarily due to the fact that members of the group directly influence each other. First, members of the same group share a common environment, which may influence their behavior. Second, except when individuals are randomly assigned to a peer group, people with similar preferences tend to belong to the same group. Both of these generate a correlation between group behavior and individual behavior which does not indicate any causal relationship between the two. Finally, there may be a causal relationship between the characteristics of the peer group members and individual behavior which does not reflect either learning or conformity. For example, employees working in firms where other people are well paid may directly benefit from some of these advantages. This is what Manski (1993) calls an exogenous (or contextual) social effect. In this paper, we ask whether the decisions of employees of a large university to enroll in the TDA plan, and the vendor they choose once enrolled, are affected by the decisions of their colleagues in the same department. We begin by presenting an intriguing example, namely the differences in participation rates among the university’s libraries. Although average staff salary and experience are very similar across libraries, participation rates are very different. This correlation may be due to peer effects, although there could be other reasons for it. In the remainder of this paper, we focus on the decisions of the administrative and support staff of the university as a whole. There are several reasons why the identification of peer effects is easier in this context than in other situations previously studied. First, the employees share a common program, centrally organized by the university. Information sessions on benefits are identical for all departments in the university. The specific department in which one works therefore does not affect the level of inputs provided by the firm to help the employees make their TDA decisions. Second, employees do not choose to work for a particular department because it made enrollment in the TDA plan easier. It is still possible for the propensity to save to be correlated within departments. For example, economists probably know more about TDA plans than physicists, and thus are more likely to participate even if we control for earnings levels. Even when we restrict our sample to the staff, we may not remove all of this correlation. Third, once we control for individual wages or tenure, the average wage or tenure in the department may not directly affect individual enrollment decisions. We follow Case and Katz (1991), and use this assumption to construct instruments for the average participation in the plan. The instruments can still be invalid if there is a correlation between average wage (or tenure) in a department and the individual’s unobserved propensity to save even after controlling for individual wage and tenure. Fourth, presumably, individuals interact mostly with co-workers who share observable characteristics such as gender, age, or tenure. Put another way, women are more likely to talk to women, men to men, and newly hired employees to newly hired employees. Therefore, it is plausible that the relevant peer group of an individual is a sub-group of his department. We use this presumption to construct a test of whether our previous results are due to correlated or exogenous effects. We regress individual participation on average participation in his or her own sub-group and the average participation in the other sub-groups. If there is a correlation between the instruments and the error term at the department level, we would see a (spurious) positive coefficient for the average decision of the other sub-group in the department. Lastly, we study the choice of the mutual fund vendor in addition to the participation decision. Because vendors offer similar services, we might think that employees do not feel very strongly about any one vendor, and that if some have a preference for one vendor over another, these preferences are probably not correlated within departments. If, using the aforementioned techniques, we find a positive association between the choice of vendors within sub-groups and departments, it should reinforce our confidence in the previous findings. The remainder of the paper is organized as follows. In Section 2, we provide evidence from the university’s libraries as an introductory example. Section 3 summarizes the reasons why behavior may be correlated within departments. Section 4 describes the features of the university’s TDA plan and the data. In Section 5, we present the results on the participation decisions. In Section 6, we turn to the choice of vendor. We find evidence of peer effects for both participation and vendor choice. Section 7 concludes.

In this paper, we set out to study the role of peer group effects on the decision to participate in the TDA and on the choice of vendor among participants. Identifying endogenous social effects is almost an impossible task in most cases where assignment to a peer group is not random. Most individuals’ decisions within a social group are correlated for reasons which have nothing to do with the fact that individuals are imitating each other. Their decisions may be influenced by common variables, observed or unobserved, such as taste, background, or common environmental factors. The application studied in this paper is a favorable case, since individuals in the university share the same plan and the same program inputs. An important source of correlation between individual’s behavior is therefore eliminated. We recognize, however, that the participation of individuals within departments may be correlated because they may share a common propensity to save or because the characteristics of some workers may have a direct effect on other’s decision. After instrumenting average participation in the department with the distribution of wages in the department or the distribution of years of service, a strong effect of average participation within sub-groups in a department (along gender, service, status, or age lines) persists. In contrast, we find no effect of the participation in the other sub-group within the department. The same results are obtained for the choice of vendor among participants to the TDA. We interpret these results as very suggestive evidence that decisions taken in one’s peer group influence one’s decision to participate and the choice of the mutual fund vendor. When participation increases by 1 percent in the department, one’s participation increases by 0.2 percent. When the average share of the contribution invested in one vendor increases by 1 percent, one’s share in this vendor increases by 0.5 percent on average. These results, if confirmed, have several important implications. First, they contribute to the literature on the determinants of retirement savings. The work of Bernheim on financial education (Bernheim and Garrett, 1996), and Madrian and Shea (2000a) on default rules has shown that economic incentives are not the only determinants of savings decisions. This paper adds to these studies by showing that peer effects are another source of extra-economic influence on people’s decisions. Individuals do not instantly learn about economic opportunities, and their environment is a strong determinant of their economic decisions. Low levels of savings by American households have been a source of preoccupation for academics and policy makers alike. Recognizing that savings decisions are influenced by peer’s savings decisions could be an important element to improve our understanding of these issues. More generally, recognizing that the financial decisions of a majority of people are influenced by the actions of others should be an important element in the way we incorporate individual decisions into macroeconomic models. Second, these results provide a possible rationale for organizing 401(k)s around the workplace. In the case of tax deferred accounts which individuals can access on their own and outside the workplace (such as IRAs), people have no obvious peer group with which to discuss their choices. The strong decline in participation in IRAs following the Tax Reform Act of 1986 has been considered as evidence that advertisement and information are one of the key elements driving participation rates (see Bernheim, 1999). When the TDA is organized by employers such as in the case of 401(k) plans, co-workers become a natural group with which to discuss it as the benefits package is common to employees, and therefore a likely conversation topic. Offering savings options organized around the workplace may therefore increase the overall level of awareness. In this paper, we make no attempt to distinguish the effect of learning and of conformity to a social norm. Assuming that our results can be interpreted as evidence that the savings behavior of my colleagues affects my saving behavior, an important question remains unanswered. Is it because I am influenced by social norms, or because I learn from them? This distinction has strong policy implications because it determines whether or not there could be a ‘multiplier effect’ of financial education and economic incentives. If learning effects are important, the role of financial education may go far beyond providing information to those who are directly exposed to it. If a few individuals enroll in the plan following an information session, it might trigger non-negligible repercussion effects. This effect is potentially important when assessing the effect of education or information sessions on contribution decisions in voluntary retirement plans such as 401(k)s. We, therefore, see this study as a first step in a broader research agenda. A simple look at existing, non-experimental data has suggested that peer effects may be present and important. this was confirmed by a few informal conversations with employees. In future work, we plan to address the shortcomings of the present study. We plan to explore two directions. First, we would like to administer an in-depth survey to a sample of employees in the university, in which we would ask about the key sources of information that have induced individuals to enroll (or not) in the plan. Second, we are planning a randomized financial education experiment, which might alter the participation rate of a random subset of employees within a subset of randomly chosen departments. We will then compare the participation rate of the non-affected individuals in these departments with the participation rate in the departments where no one was affected. By doing so, we will directly address the question of the multiplier of financial education efforts.