Bhanot, S. P. (2017).
Journal of Economic Behavior &
Organization, 142, 250-261.
Abstract
Across domains, people struggle to follow through on their commitments. This can happen for many reasons, including dishonesty, forgetfulness, or insufficient intrinsic motivation. Social scientists have explored the reasons for persistent failures to follow through, suggesting that eliciting explicit promises can be an effective way to motivate action. This paper presents a field experiment that tests the effect of explicit promises, in the form of “honor pledges,” on loan repayment rates. The experiment was conducted with LendUp, an online lender, and targeted 4,883 first-time borrowers with the firm. Individuals were randomized into four groups, with the following experimental treatments: (1) having no honor pledge to complete (control); (2) signing a given honor pledge; (3) re-typing the same honor pledge as in (2) before signing; and (4) coming up with a personal honor pledge to type and sign. I also randomized whether or not borrowers were reminded of the honor pledge they signed prior to the repayment deadline. The results suggest that the honor pledge treatments had minimal impacts on repayment, and that reminders of the pledges were similarly ineffective. This suggests that borrowers who fail to repay loans do so not because of dishonesty or behavioral biases, but because they suffer from true financial hardship and are simply unable to repay.
Discussion
Literature in experimental economics and psychology often finds impacts of promises and explicit honor pledges on behavior, and in particular on reducing dishonest behavior. However, the results of this field experiment suggest no meaningful effects from an explicit promise (and indeed, a salient promise) on loan repayment behavior in a real-world setting, with money at stake. Furthermore, a self-written honor pledge was no more efficacious than any other, and altering the salience of the honor pledge, both at loan initiation and in reminder emails, had negligible impacts on outcomes. In other words, I find no evidence for the hypotheses that salience, reminders, or personalization strengthen the impact of a promise on behavior. Indeed, the results of the study suggest that online loan repayment is a domain where such behavioral tools do not have an impact on decisions. This is a significant result, because it provides insights into why borrowers might fail to repay loans; most notably, it suggests that the failure to repay short-term loans may not be a question of dishonest behavior or behavioral biases, but rather an indication of true financial hardship. Simply put, when repayment is not financially possible, framing, reminders, or other interventions utilizing behavioral science are of limited use.
