Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 31

"Put a Contract Out on Yourself"1
Professors who study behavioral economics are not themselves immune from willpower problems. Two Yale professors, Dean Karlan and Ian Ayres, who found it difficult to maintain their ideal weights, hit upon a brilliant strategy to do so. The strategy, which relies on economic incentives, works as follows. Promise a friend to reach a target weight by a certain date and then maintain this weight. Put up an amount of money, say $100, that is forfeited if the goal is not reached or maintained. The threat of losing $100 may allow the person to resist the short-run temptation of breaking with a diet or exercise plan. If the commitment works, the money need never be paid, just promised.
The professors claim to personally have much more at stake than $100-more on the order of $5,000. Both claim to have maintained their goals without having to pay anything out.
Savings Schemes in the Philippines
The idea of using contracts with economic incentives to solve self-control problems was supported by Karlan's earlier research on increasing savings through the use of savings accounts with commitment features.2 The study offered savers the possibility of opening an account that limited withdrawals until a certain target date or savings amount was reached. Subjects who were more likely to suffer selfcontrol problems (based on responses to hypothetical questions about delaying gratification) more often chose to participate in these new savings accounts when offered the chance. Access to these new savings accounts almost doubled savings for the subjects.
Back to the Numerical Example
To see how putting money behind one's commitments can help with self-control problems, return to the example in the text of a student who plans on Sunday to study on Monday (at a cost of 20 that day) for a test on Friday (gaining 30 that day if well prepared) but who discounts utility every day after the present by half. Without any payments, we saw that the student did not carry out Sunday's plan to study because on Monday the weighted sum of utilities from studying was negative: - 20 + 30/2 =- 5, but if the student promises on Sunday to pay more than 5 (in utility terms) if he or she does not study on Monday, this will induce the student to study because now the loss from studying exceeds that from not studying (5 or more) from Monday's perspective.
stickK.com
The Yale professors have developed a Web site, http://www. stickK.com that facilitates commitment contracts by having people fill out a form, set a pledge amount, provide a payment card that will be charged if the commitment is not met, and select someone to serve as a "referee" to verify whether or not the pledge is met. As of this writing, over a quarter of a million contracts involving $17 million in pledges have been signed for commitments ranging from quitting smoking, to stopping nail biting, to finishing a screenplay. To further enhance commitment value, one can choose to forfeit the money to an enemy or to a charity that supports causes one strongly opposes (such as an opposing political party).
Numerous other applications have been developed to help combat self-control problems. Anti-Social, SelfControl, and StayFocused block access to social-networking websites, email, and other computer distractions for a specified period of time. Social-networking websites can themselves be a positive force for self control through virtual fitness groups allowing members to keep track of each others' progress in achieving exercise goals.
Whom would you select to "referee" your commitment contract? What would be the drawbacks of selecting a friend to "referee" the commitment contract? What about an enemy?