In an interview with FAI, economist Jenny Aker explained that effective commitment savings products are those that balance flexibility and restrictions:
“If you give someone a savings product and it completely ties their hand, they don’t want to use it. They want to have a little bit of that tying of the hand so they can’t spend that money but they don’t want to be completely divorced from access to that money.”
Much of the research on commitments focuses on savings products, which makes sense: when trying to save money, some “tying of the hands” helps. Like dieting, setting money aside requires the willpower to deny yourself something you want in the present to meet a goal in the future. To win the struggle for control between your present self and your future self, little commitment nudges can change behavior. Where product design gets tricky is in determining how restrictive the commitment should be. A study of savers in Kenya gives us one clue that it might not take much: when given the choice of letting neighbors hold the key to a savings lock box or holding the keys themselves, participants saved more when they chose the latter. Simply having the physical barrier of the box was enough to nudge them to save.
A new paper by De Arcangelis et al. tests out the idea of commitment nudging for migrants sending money back home to their families. The financial relationship between remittance recipients and senders mirrors the tension between savers’ present and future selves: migrants may wish to specify certain uses for their money (e.g. that it be used for school tuition) that their relatives back home find it hard to comply with in the face of pressing day-to-day needs. De Arcangelis and co-authors show that a similar “tying of the hands” may be effective to address this tension and, as in the Kenya study, it doesn’t need to be highly restrictive.
In a lab experiment, the authors offered four remittance-sending options to Filipino migrants living in Rome. They could allocate money to family members back home with no restrictions; add a message indicating funds were for education; pay tuition directly to the school; or pay the school and receive reports on student progress. The second option, simply adding an education label, raised the amount the migrants said they would remit by more than 15%, while the option to pay the school directly only added another 2%. A similar study in Morocco found that children in families receiving cash transfers “labeled” for education (but with no enforcement that the funds actually be used for education) stayed in school longer than families receiving more restrictive transfers. (Although it is important to note, the labeled transfers increased with every year a student remained in school.) As with the Filipino migrants, labeling funds landed in the “sweet spot” of soft commitment.
The big unanswered question for me is why - if the Filipino migrants said they preferred their money to be used for education - they wouldn’t all choose the stronger commitment device of having their remittances go to pay tuition directly. Cultural attitudes of respect within the family could be one explanation: it’s one thing to suggest to your mother how she spends the money but quite another to control her spending. Another reason could be lack of trust in the school system, an explanation suggested by the authors’ comments that they ran into “a number of difficulties” with the direct tuition payments, and that schools were “very slow” to provide payment details. Here the senders may know something about the school system back home that the researchers don’t.