The Earned Income Credit and Child Tax Credit are vital income support programs, amounting to over three months of regular pay for many low and moderate-income families. These credits are generally received through the annual tax refund. At that time, recipients are faced with a menu of options that include placing the refund in a savings vehicle such as a Treasury bond or matched savings account. This project aims to cast light on this savings decision and improve the welfare of low and moderate- income families. In particular, we will test whether tax filers are interested in making a commitment ahead of time to saving the refund. This soft-commitment study will allow formal tests for self-control problems, impatience, and hyperbolic discounting behavior. First, by offering varying amounts of instant and delayed savings incentives, we will measure the relative value placed on immediate versus delayed gratification, and by extension, the degree of impatience present in the target population. Second, by allowing tax filers the opportunity to pre-commit, we will estimate the degree to which individuals are aware of their future impatience and desire to curb self-control problems. The results may inform income tax refund-based products that leverage commitment devices to overcome barriers to saving.
This research aims to shed light on the determinants of household savings, with a specific focus on middle- and low-income households. We will test key theories from the field of behavioral economics and our results will inform future policy interventions aimed at increasing savings among this population. More adequate savings can allow these households to better withstand unforeseen economic shocks and also prepare for a decent standard of living during retirement.
