No Free Lunch

WHILE out to lunch this weekend, I noticed a note at the bottom of the menu:
“We add a 15% gratuity to every bill, you are welcome to subtract or add more”
Restaurant patrons were being defaulted into tipping with an opt-out clause. Though I found it far more offensive when I leaned that my lunch companion’s employer defaults her into charitable giving. Her firm automatically subtracts a fraction of her salary and uses the proceeds to donate to several charities of its choice. She can opt out, but most employees do not. She claims few will have the audacity to say to HR, “I don’t want to give to charity.”
We often find ourselves defaulted into many things, such as our choice of power company. But actually taking money out of our pockets by default strikes me as especially presumptuous. The default option has become popular amongst policy makers and employers to induce desirable behaviour. The 2006 US Pension Protection Act gives employers incentives to automatically enrol their employees in a pension plan. Automatic pension enrolment substantially increases participation. Most economists agree the default enrolment, when it comes to saving, is beneficial. Many people need to save more if they want a comfortable retirement. They may not save as much as they should because time inconsistent preferences, procrastination, or they just feel over-whelmed by planning for retirement. Defaulting people into a pension plan facilitates a decision in the employees’ best interest, a decision they might not otherwise make. If they feel strongly about not participating, they can easily opt out.
However, defaulting employees into charitable giving makes my libertarian sensibilities uneasy. Giving to charity is a wonderful thing and has many externalities for the firm in terms of being a stronger presence in the business and social community. Employees may even indirectly benefit from it. But there seems something, well tacky, about automatically taking money from your employees and giving it in the firm’s name.
You can argue defaulting into a pension plan serves the employees’ interest and is not completely inconsistent with their preferences. I am not sure how neatly this rational applies to philanthropy. Also opting out of charitable giving carries a social stigma, which means employees feel pressured to donate even if they don’t want to.
If there does exist a benefit to encouraging executives to donate more to charity, it would be better to have employees opt in to giving. Perhaps give employees an explicit option to donate from their pre-tax income. Employees could even choose amongst a list of causes the firm supports. This would facilitate giving and the employees and firm still reap the tax and community benefits.
Default behaviour is a strong tool. Using it to elicit any behaviour we define as desirable, be it tipping wait staff, saving, or philanthropy becomes a slippery slope. All the more reason we should use it sparingly.