Which Early Withdrawal Penalty Attracts the Most Deposits to a Commitment Savings Account?

Previous research has shown that some people voluntarily use commitment contracts that restrict their own choice sets. We study how people divide money between two accounts: a liquid account that permits unrestricted withdrawals and a commitment account that is randomly assigned in a between-subject design to have either a 10% early withdrawal penalty, or a 20% early withdrawal penalty, or not to allow early withdrawals at all (i.e., an infinite penalty). When the liquid account and the commitment account pay the same interest rate, higher early-withdrawal penalties attract more commitment account deposits. This pattern is predicted by the hypothesis that some participants are partially- or fully-sophisticated present-biased agents. Such agents perceive that higher penalties generate greater scope for commitment by disincentivizing (penalized) early withdrawals. The experiment also shows that when the commitment account pays a higher interest rate than the liquid account, the positive empirical slope relating penalties and commitment deposits is flattened, suggesting that naïve present-biased agents or agents with standard exponential discounting are also in our sample. Across all of our experimental treatments, higher early withdrawal penalties on the commitment account sometimes increase and never reduce allocations to the commitment account.