The influence of decision costs on investments in Individual Savings Accounts

This study considers the efficacy of a tax incentivised savings scheme in context of decision making rigidities. Analysis is based on a classical life-cycle model of savings and investment decisions, augmented with a salience cost over participation in Individual Savings Accounts (ISAs) currently run in the UK. Calibration results indicate that salience costs help to match the model to observed rates of participation in ISAs. The calibrated model suggests that the price effects of ISAs are insufficient to generate appreciable increases in private sector savings, with or without salience costs. In this context, salience costs have an important infl‡uence on the distribution of welfare bene…fits that are delivered by the ISAs scheme.