Pagando El Gimnasio

American Economic Association
Paying Not to Go to the Gym

Author(s): Stefano DellaVigna and Ulrike Malmendier
Reviewed work(s):
Source: The American Economic Review, Vol. 96, No. 3 (Jun., 2006), pp. 694-719
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/30034067 .
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PayingNotto Go to theGym
By STEFANO DELLAVIGNA AND ULRIKE MALMENDIER*
How do consumers choosefroma menuofcontracts?We analyzea noveldataset

from three U.S. healthclubswithinformation onboththecontractual choiceand the
day-to-day attendance decisionsof 7,752members over three years.Theobserved
consumerbehavioris difficult to reconcilewithstandardpreferences and beliefs.
First,members whochoosea contractwitha flatmonthly fee ofover$70 attendon
average4.3 timesper month.Theypay a priceper expectedvisitofmorethan$17,
eventhoughtheycouldpay $10 per visitusinga 10-visitpass. On average,these
usersforgo savingsof $600 duringtheirmembership. Second,consumerswho
choosea monthly contractare 17 percentmorelikelyto stayenrolledbeyondone
yearthanuserscommitting fora year.Thisis surprising becausemonthly members
pay higher feesfortheoptiontocanceleach month. Wealso document cancellation
delaysand attendance expectations, amongother findings.Leadingexplanations for
ourfindings are overconfidence aboutfutureself-control or aboutfutureefficiency.
Overconfident agentsoverestimate attendanceas well as thecancellationproba-
bilityof automatically renewedcontracts.Our resultssuggestthatmakinginfer-
encesfromobservedcontractchoiceundertherationalexpectation hypothesis can
lead to biases in theestimation of consumerpreferences. (JEL DO, D12, D91)
"Saturday 31 December.New Year's Res- tions of monthlyairtimeminutesand prices.

olutions.I WILL [...] go to thegymthree Creditcard users choose betweenteaserrate
timesa weeknotmerely tobuysandwich." offers andcontracts witha constantinterest
rate.
BridgetJones'sDiary:A Novel A largeliterature in industrial
organizationan-
alyzes the profit-maximizing contractdesign
"Monday28 April.[...] Gymvisits0, no. (JeanTirole,1988). A standardassumption in
of gymvisitsso farthisyear 1, cost of is thatconsumershave rational
this literature
gymmembership per yeare370; cost of abouttheirfuture fre-
singlegymvisite123 (v. bad economy)." expectations consumption
BridgetJones:TheEdge ofReason quency and choose the utility-maximizing
contract.
Manyfirmsofferconsumersa menuof con- In thispaper,we provideevidencethatthis
tracts.Cellularphone users choose combina- maynotalwaysbe thecase. We presenta novel
datasetfromthreeU.S. healthclubsthatallows
us toanalyzethecontractual choicesofconsum-
* DellaVigna:Department of Economics,University of ers in lightof theiractualconsumption behav-
Californiaat Berkeley,549 Evans Hall, Berkeley,CA
94720,andNationalBureauofEconomicResearch(e-mail:
Malmendier:
sdellavi@econ.berkeley.edu); GraduateSchool
of Business,Stanford
University,518 MemorialWay,Stan- seminars in CREST, DartmouthCollege,HarvardUniversity,
ford, CA 94305, and NBER (e-mail: malmendier_ UniversityofMichigan, AnnArbor, NorthwesternUniversity,
Earlierversions
ulrike@gsb.stanford.edu). of thispaperwere NewYorkUniversity, UC Berkeley, UCLA,theEnteEinaudi,
underthetitles"Self-Control
distributed in theMarket:Evi- theSITE 2001 and2002,andat theEasternEconomicAsso-
dencefromtheHealthClub Industry" and "Overestimating ciation2002 fortheircomments. We thankBryanS. Graham
EvidencefromtheHealthClub Industry."
Self-Control: We forproviding Mathematicacode andTobiasAdrian, Augustin
thankDoug Bernheim (theeditor),twoanonymous referees, Landier,andSendhilMullainathan forinspiring
conversations
MariosAngeletos,GeorgeBaker,RachelCroson,RajeevDe- at the beginningof thisproject.TatyanaDeryugina, Tricia
OliverHart,CarolineHoxby,Daniele
hejia,RichardGilbert, Glynn,BurakGuner,CameliaKuhnen,ScottMcLinn,Boris
Paserman, AntonioRangel,Emmanuel Saez, AndreiShleifer, Nenchev,NikitaPiankov,andJustin Sydnorprovidedexcel-
Jeremy Tobacman,KlausWertenbroch, Justin and,in
Wolfers, lentresearchassistance.For financialsupport,DellaVigna
EdwardGlaeser,LawrenceKatz,and David Laib-
particular, thanks theBankofItaly,andMalmendier thankstheGerman
son fortheircomments. We also thanktheparticipants of AcademicExchangeService(DAAD).
694
VOL. 96 NO. 3 DELLAVIGNAAND MALMENDIER:PAYINGNOT TO GO TO THE GYM 695
TABLE 1-EMPIRICAL FEATURESAND POSSIBLEEXPLANATIONS
Time
Trans.costs Membership inconsist. Overestimation
Standard of payment benefits
per Limited with Time inconsist. of future
model perusage usage memory sophistication with naivet6 efficiency Persuasion
Finding1
Priceperaverageattendance Distasteof Membership CommitmentCommitment, Overestimation Pressureof
= $17.27 pay per benefits overestimation of attendance salesman
usage of attendance
Finding2
Averageattendance in months Sortingat Sortingat Sortingat Sortingat Sortingat Sortingat Sortingat Sortingat
2-4 higherin annualthan enrollment enrollment enrollment enrollment enrollment enrollment enrollment enrollment
monthly contract
Finding3
Userspredict9.50 monthly Overestimation Overestimation
visits;actualmonthly visits of attendance of attendance
are 4.17
Finding4
Intervalbetweenlast Distasteof Membership Forgetto Overestimation Overestimation Pressureof
attendance and termination pay per benefits cancel of cancellation of cancellation salesman
2.31 fullmonths usage
Finding5
Survivalprobabilityafter14 Forgetto Overestimation Overestimation Pressureof
months17 percenthigher cancel of cancellation of cancellation salesman
formonthly thanforannual
contract
Finding6
Averageattendance 27 percent Learning, Learning, Learning, Learning, Learning, Learning, Learning, Learning,
higherin secondyearfor sortingout sortingout sortingout sortingout sortingout sortingout sortingout sortingout
annualcontract
Finding7
Decreasingaverageattendance Forgetto Overestimation Overestimation Pressureof
overtimein monthly cancel of cancellation of cancellation salesman
contract
Finding8
Positivecorrelationof price Heterogeneityin Heterogeneity in
peraverageattendance and naivet6 overconf.
intervalbetweenlast
attendance and termination
ior. The datasetcontainsinformation bothon of visits.Eightypercentof themonthly mem-

thetypeof membership and theday-to-day at- berswouldhave been betteroffhad theypaid
tendancedecisionsof 7,752 healthclub mem- pervisitforthesame numberof visits.
bers overthreeyears.We findthatconsumers Second,consumers who choosethemonthly
choosea contract thatappearssuboptimal given contractare 17 percentmorelikelyto stayen-
theirattendancefrequency.In addition,low- rolledbeyondone yearthanuserschoosingthe
attendance consumers delaycancellingthiscon- annual contract.This is surprisingbecause
tractdespitesmalltransactioncosts. monthly members payhigherfeesfortheoption
Our empiricalanalysisexploitsthepresence to cancel each month.This resultoccurseven
of a contractualmenu.Consumerscan choose thoughhigh-attendance userssortintothe an-
between two flat-ratecontracts-a monthly nual contractat enrollment.
contractandan annualcontract-anda pay-per- These and additional empirical findings
visitoption.The monthly contract
is automati- (summarized in Table 1) are hardto reconcile
cally renewedfrommonthto monthuntilthe withstandardpreferences and beliefs.We ex-
consumercancels.The annualcontract, instead, plore potentialexplanations,includinghigh
expiresafter12 monthsunless the consumer transaction costs of paymentper usage, risk
explicitlyrenewsit. The variationin the per- aversion,underestimation ofcostsofattendance
usage pricingand in the renewalprocedures and of cancellation,
timeinconsistency, naivet6
allowsus toidentifyseveralpuzzlingfeaturesof aboutthetimeinconsistency, andpersuasionby
consumerbehavior. healthclub employees.
First, consumerswho choose a monthly In ourview,themostparsimonious explana-
membership of over $70 per monthpay on tionsarethoseallowingforoverconfidence (na-
70
average percentmorethantheywouldunder ivetd).Consumersoverestimate, for example,
thepay-as-you-go contractforthesamenumber theirfutureself-control
ortheirfutureefficiency
696 THE AMERICANECONOMIC REVIEW JUNE2006
in pursuing costlyactivities.Thisleadsto over- theassumption ofrationalexpectations can lead

estimation of attendance and of cancellationin to significantbias.Forexample,we wouldhave
automatically renewedcontracts. As an alterna- concludedthatmonthly membersattendon av-
tiveexplanation, persuasionby health clubem- erage at least twice a week. This erroneous
ployeescan explainmostfindings. conclusionwouldhaveoverstated theimpactof
In a simpleyeteconomicallysignificant de- healthclub enrollment on healthoutcomes.
cision-enrollmentand attendance in a health Finally,ourfindings haveimplications forthe
club-consumers deviatesystematically from policydebate on obesity(David M. Cutleretal.,
the optimalcontractual choice. In the health 2003). Subsidizing enrollment in healthclubsis
clubsof oursample,theaveragenonsubsidized likely to have only small effects on obesity
userchoosesthemonthly contractand,bydoing rates, given the low average attendanceof
so, forgoessavingsof about$600 permember- members.
ship,outof a totalamountofabout$1,400paid The remainder of thepaperis organizedas
to thehealthclub.The resultsof thisstudyare follows.In SectionI, we introducethe main
likelyto generalizeto the32.8 millionAmeri- featuresofthehealthclubdataset.In SectionII,
cans who exercisein one of the 16,983 U.S. we develop predictionsabout the contractual
healthclubs.Therefore, bothinterms ofmonetary choice at enrollment and testthe predictions
magnitude andin termsofpopulation involved, empirically. In SectionIII, we presenta similar
thenonstandard behaviorhas a significant eco- analysisofthecontractual choiceandconsump-
nomicimpact.Our findings are also consistent tionbehaviorover time.SectionIV discusses
withfindings on consumer behaviorinthecredit possibleexplanations fortheempiricalfindings.
card industry (Haiyan Shui and LawrenceM. SectionV concludes.
Ausubel,2004) and employeechoiceof 401(k)
plans(Brigitte C. Madrianand DennisF. Shea, I. HealthClubDataset
2001).
The analysisofconsumer behavioris justthe A. HealthClub Industry
firststeptowarda betterunderstanding of in-
dustrieswhereconsumersdisplaynonstandard As ofJanuary 2001, 16,983clubswereoper-
preferences or beliefs.Profit-maximizing firms atingin theUnitedStates.The industry reve-
shouldrespondto the nonstandard featuresof nues forthe year2000 totalled$11.6 billion.
consumer behaviorintheircontract design.This The memberships in thesameperiodwas 32.8
is thecentralthemeofthegrowingliterature on million,up from17.4millionin 1987.Fifty-one
behavioralindustrial organization (DellaVigna percentof theusersweremembers in commer-
and Malmendier,2004; KfirEliaz and Ran cial healthclubs,while34 percentweremem-
Spiegler, forthcoming; Xavier Gabaix and bers in nonprofit facilities.Only the market
David Laibson, forthcoming; Paul Heidhues leaderBallyTotalFitness,with$1,007 million
and BotondKoszegi,2005), surveyedin Glenn in revenuesand 4 millionmembers, is publicly
Ellison(forthcoming). The largeeffectof small traded.Few companiesoperatein morethanten
cancellation costson renewalratesmayexplain states.Ownershipconcentration is in thetenth
thehighfrequency of contracts withautomatic percentileof U.S. industries.
renewalinthenewspaper, creditcard,andmail-
orderindustry. The findings have implications B. Dataset
also forthedesignof flat-rate pricing(Eugenio
J. Miravete,2003). In DellaVigna and Mal- We collecteda newpaneldatasetfromthree
mendier(2004),we exploretheimplications for healthclubslocatedin New England,whichwe
firmpricingof a leadingexplanationof our label clubs 1, 2, and 3. The datasetcontains
results:overconfidence aboutself-control. information on thecontractual choicesand the
Ourfindings suggest caution inmakinginfer- day-to-day attendance of users who enrolled
ences about consumerpreferences fromob- afterApril1, 1997.The sampleperiodis April
servedchoices of products(Igal Hendel and 1997 through July2000 forclub 1 and April
Aviv Nevo, 2004) or contracts(Miraveteand 1997 through February 2001 forclubs2 and 3.
Lars-Hendrik Rrller,2003), whenactualcon- The day-to-day recordof usage is made avail-
sumption is unobserved. Inferences madeunder able by thetechnology regulating theaccess to
thesehealthclubs,describedbelow.The panel sidypaid bytheircompany,and no initiation

of contractual choices comes fromthe billing fee.Cancellation can be doneinpersonat the
records.Each entry in theaccounting dataspec- clubor by sendinga written note.3If cancel-
ifiesthe price paid forthe transaction and a lation takes place beforethe 10th of the
four-lettercode.Thiscode allowsus totrackthe month, no further feesare due,and theusers
membershiptype-standard,student,family, can attenduntiltheend of themonth.Mem-
corporate-aswell as detailslike thesubsidiz- berswhocancelafterthe10thhavetopaythe
ing company(if any). feeforthenextmonthandcan attenduntilthe
Several companieslocated near the clubs end of thefollowingmonth.
subsidize their employees' attendance.For * The annual contractchargesup frontten
these corporatemembers,the healthclub re- timestheapplicablemonthly fee,e.g., $850
ceives part of the membership paymentsdi- fora standard membership.4 Usersthusgeta
rectlyfromthefirms, withtheremainder being discountof 2 monthsout of 12 in exchange
paid by the members. The health club informs fora yearlycommitment. The initiationfeeis
thecompaniesperiodically aboutthenumberof thesameas underthecorresponding monthly
employeesenrolledand theirattendance. This contract.At theend of theyear,thecontract
createsincentives forthehealthclub to record expiresand memberswho wish to stayen-
attendancesaccuratelyor, possibly,to over- rolledhave to sign up again, eitherforan
recordthem. annualor fora monthly contract. In orderto
encourage renewal, the club sends out a re-
C. Contractual Menu mindercard one monthbeforethe contract
expires.
We conducted a surveyofthe97 healthclubs * The pay-per-visit systemofferstwo options,
intheBostonmetropolitan areatodocument the eitherto pay $12 per visitor to purchasea
contractdesignin the industry.'Healthclubs ten-visitpass for$100. Transaction costsfor
offerup to threeoptions:87 clubs offera the ten-visitpass are small. Users provide
monthly contract and a monthly feeis automat- basic demographic information andreceivea
ically debitedeach monthto a creditcard or cardfortenvisits.Unfortunately, attendance
bank accountuntilthe user cancels; 90 clubs is nottrackedforthepay-per-visit users.
offeran annualcontract. Bothmonthly and an-
nual contracts have an initiation fee butno fee Usersof club 3 face thesame menuof con-
pervisit.Finally,82 clubsoffera pay-per-visit tractswithlowerpricesand slightlydifferent
option,oftenin the formof a ten-visitpass. services.The monthly fee rangesfrom$13 to
Healthclubs 1 and 2 in our sampleofferthe $52, and theinitiation fee is at most$50. The
threetypesof contract withthefollowingaddi- annual fee in the annual contractequals ten
tionalfeatures:2 timesthecorresponding monthly fee.The pay-
per-visitoptionsare a $10 fee per visit,and a
* The monthly contract has a monthly feerang- $80 pass fortenvisits.
ing between$70 (discountedlevel) and $85 Underall typesofmembership, usersreceive
(standardlevel).Noncorporate usersalso pay cards theyhave to depositin a basketat the
an initiation fee rangingfrom$0 (in promo- frontdesk when theyenter.While theyare
tionalperiods)to $150. Corporateusersgen- exercising, a healthclubemployeeswipesthem
erally pay an out-of-pocket monthlyfee (marksthe visitforthe ten-visitpasses), and
between$19 and $65, dependingon thesub- userspickthemup whentheyexit.Thismethod
guarantees a highrecording precisionevendur-
ingpeak hours.The three contracts giverightto
1
For detailson the survey,see DellaVigna and Mal- thesame services,i.e., a temporary locker,tow-
mendier(2004).
2
Contractsforone to six monthswithautomaticexpi-
rationare also available.We do not includethemin our
analysis,sincetheyaretypicallytargetedtowardoccasional 3 Some userscancel by discontinuing the paymentsto
summerusers. We also remove fromthe sample free, thehealthclub.
limited-time memberships thatare occasionallygivento 4 The annualfeecan be
paid in threeinstallments
due in
employeesof the subsidizingcompanies. thefirstsix months.
els,5andaccesstotheequipment.Also,boththe club 1 has 22 percentmoremembersthanclub

monthly andtheannualcontractallowmembers 2, and morethantwiceas manymembersas
to "freeze" (suspend) theirmembershipfor club 3. The percentageof completedspells is
threemonthsper year.6Users witha monthly similaracrosstheclubs,above 60 percent.Of
contractdo nothave to pay theirmonthlyfee the 7,752 individualsenrolledin any club, 89
duringthefreezingperiod.Annualmembers get percentchoosea monthly membership as their
additionalusage time afterthe original 12 firstcontract.Health club membersrarely
months. changethetypeof contract theyinitiallyenroll
in.In additionto thewholesample,we also use
D. SampleConstruction the sample"no subsidy,"whichincludesonly
unsubsidizedmemberships.We consider a
We matchtheinformation on attendance and membership to be unsubsidizedif, over the
on contract choicein thethreeclubsto forma whole spell,theaverageout-of-pocket fee ex-
longitudinaldataset with monthly observations, ceeds $70 per month for enrollment in a
the
covering period from April 1997 to July monthly membership and $700 per year ($58
2000 (club 1) andtoFebruary 2001 (clubs2 and per month)forenrollment in an annualmem-
3). Ouranalysisfocuseson enrollment spells.A bership.This smallersampleincludes1,070in-
spell startswheneveran individualenrolls(or dividuals(14 percentof thefullsample).
reenrolls)in a club and ends whenever the in-
dividualquits.We definespellsto be censored E. DescriptiveStatistics
ifeithertheenrollment is ongoingat theendof
thesampleperiod,or theindividualswitchesto In clubs 1 and 2 (columns 1 and 2), the
a short-term contractor receivesa promotional averageamountspentper spell is about$550,
membership. Accordingly, spellsarecompleted and theaveragefee permonthrangesbetween
iftheindividualcancelsthemembership (under $44 and $52. For corporateusers,these are
a monthly contract)or if the membership ex- out-of-pocket payments anddo notincludesub-
pires(underan annualcontract) withinthesam- sidies paid by the sponsoringfirms.The
ple period.Individualshave multiplespells if amountsare substantially lowerin club 3 (col-
theyquit the club and reenrollat some later umn 3), since the contractsare cheaper,and
date. substantially higherin thesample"no subsidy"
The initialsampleincludes10,175individu- (columns7 and 8). Acrossall clubs(column4),
als. We dropindividualswho were neveren- theinitiation feeaverages$4 andis paidbyonly
rolledin eithera monthly or an annualcontract 14 percentof users.Individualswitha monthly
(1,867 individuals).We eliminateindividuals contractattendon average four times per
withdata inconsistencies (49 individuals).We month,and individualswithan annualcontract
also excludeuserswitha familymembership to attendon average4.4 timespermonth.Atten-
avoidissuesregarding thejointconsumption of dancein club 1 (column1) is somewhathigher
theservices(247 individuals).Finally,in order thanin theotherclubs.Freezingofa contract is
to limitthesampleto first-time usersof these rarein all theclubs.The bottompartof Table
clubs,we dropuserswho had a freeor a sea- 2 displaystheavailabledemographic controls.
sonalmembership beforetheychosea monthly Usersaresomewhat morelikelytobe malethan
or an annualcontract (260 individuals).(Addi- femaleandareon averagein theirearlythirties.
tionalinformation on thedatasetconstruction is Corporatememberships accountfor50 percent
availablein theData Appendix.) of the sample,whilestudentmemberships ac-
This leaves us with a of
sample 7,752 indi- count for 2
only percent.
vidualsand 8,273 enrollment spells.In thepa-
per,we consideronlythefirstenrollment spell
foreachindividual. As rowI ofTable 2 shows, II. ContractChoiceat Enrollment
of theStandardModel
A. Predictions
5 Towels are notincludedin membershipsin club 3.
6
Monthlyuserscan also quitforup to threeadditional We set up a model of contractchoice and
monthswithout repayingtheinitiation
fee. We assumethathealth
healthclub attendance.
TABLE 2-DESCRIPTIVE STATISTICS
Sample:All Sample:No subsidy

Sample:All
All clubs All clubs
Club 1 Club 2 Club 3 All clubs
First First First First
All All All All contract contract contract contract
contr. contr. contr. contr. monthly annual monthly annual
(1) (2) (3) (4) (5) (6) (7) (8)
Numberof spells
Total 3,495 2,866 1,391 7,752 6,875 877 866 204
Completedspells 2431 1825 990 5246 5246 509 581 112
Total amountin $ 558.30 551.50 314.08 511.96 498.40 618.25 918.02 1,022.56
(500.52) (551.50) (304.18) (500.52) (504.94) (450.71) (699.58) (536.89)
N = 3,495 N = 2,866 N = 1,391 N = 7,752 N = 6,875 N = 877 N = 866 N = 204
Initiation
fee 6.35 1.91 2.89 4.09 3.88 5.74 14.68 17.65
(26.64) (11.91) (13.03) (20.23) (19.51) (25.10) (41.88) (45.57)
N = 3,495 N = 2,866 N = 1,391 N = 7,752 N = 6,875 N = 877 N = 866 N = 204
Averagefeepermonth
Monthlycontract 52.14 49.04 31.27 42.22 47.12 55.98 78.56 73.60
(18.57) (19.09) (10.97) (19.22) (19.19) (20.58) (5.03) (15.78)
N= 3,185 N = 2,551 N= 1,262 N = 6,951 N = 6,875 N= 76 N = 866 N = 20
Annualcontract 48.19 44.33 24.13 43.01 46.99 42.57 70.12 66.27
(15.64) (17.08) (8.75) (17.45) (15.10) (17.64) (4.54) (4.03)
N = 436 N = 391 N = 147 N = 974 N = 97 N = 877 N= 6 N = 204
Averageattendance
permonth
Monthlycontract 4.13 3.98 3.76 4.01 4.00 4.49 3.93 5.20
(3.92) (3.76) (3.69) (3.82) (3.82) (3.77) (3.76) (4.29)
N = 3,138 N = 2,551 N = 1,262 N = 6,951 N = 6,875 N = 76 N = 866 N = 20
Annualcontract 4.57 4.22 4.20 4.37 5.71 4.22 7.26 4.35
(3.98) (4.08) (3.95) (4.01) (4.27) (3.96) (3.50) (3.95)
N = 436 N = 391 N = 147 N = 974 N = 97 N = 877 N= 6 N = 204
Contractchoiceperspell
Monthswithmonthly contract 9.03 6.95 8.94 8.98 10.08 0.42 11.67 0.50
(8.27) (9.03) (8.84) (8.66) (8.57) (2.08) (8.87) (2.26)
N = 3,495 N = 2,866 N = 1,391 N = 7,752 N = 6,875 N = 877 N = 866 N = 204
Monthswithannualcontract 1.55 1.97 1.42 1.68 0.15 13.68 0.07 14.92
(4.67) (5.78) (4.83) (5.14) (1.50) (7.32) (1.05) (7.86)
N = 3,495 N = 2,866 N = 1,391 N = 7,752 N = 6,875 N = 877 N = 866 N = 204
Freezing 0.26 0.31 0.18 0.26 0.29 0.05 0.35 0.04
(0.94) (1.14) (0.72) (0.99) (1.04) (0.38) (1.20) (0.32)
N = 3,495 N = 2,866 N = 1,391 N = 7,752 N = 6,875 N = 877 N = 866 N = 204
Female 0.44 0.48 0.47 0.46 0.48 0.34 0.38 0.35
(0.50) (0.50) (0.50) (0.50) (0.50) (0.47) (0.49) (0.48)
N = 3,487 N = 2,866 N = 1,391 N = 7,744 N = 6,875 N = 876 N = 866 N = 204
Age at sign-up 30.71 31.51 35.08 31.79 31.50 34.06 33.12 34.42
(8.44) (8.91) (9.30) (8.91) (8.78) (9.63) (9.75) (10.86)
N = 3,293 N = 2,745 N = 1,316 N = 7,354 N = 6,523 N = 831 N = 812 N = 193
Corporatemember 0.43 0.61 0.43 0.50 0.50 0.52 0.17 0.16
(0.50) (0.49) (0.50) (0.50) (0.50) (0.50) (0.37) (0.37)
N = 3,495 N = 2,866 N = 1,391 N = 7,752 N = 7,079 N = 877 N = 866 N = 204
Student 0.05 0.00 0.00 0.02 0.02 0.01 0.00 0.00
(0.21) (0.05) (0.05) (0.15) (0.15) (0.12) (0.05) (0.07)
N = 3,495 N = 2,866 N = 1,391 N = 7,752 N = 6,875 N = 877 N = 866 N = 204
Notes: Standarddeviationin parentheses. An enrollment spell startswheneveran individualenrollsin theclub and ends
whenevertheindividualquitsor is censored.The sample"no subsidy"consistsof thespellsin whichtheaverageadjusted
monthly feeis at least$70 ifthespellstartswitha monthlycontract andat least$58 ifthespellstartswithan annualcontract.
The spellsin column"first contract
monthly" startwitha monthly contract.The spellsin column"firstcontract
annual"start
withan annualcontract. "Averagepriceper month"refersto theout-of-pocket feein thecase of corporateusers.
clubattendanceinvolvesimmediate effort
costs can be high(c = -) or low (c = c), and indi-
and delayedhealthbenefits,and thattheeffort viduals differin the ex ante probability that
costsare uncertain
ex ante.In particular,
costs costswill be high.A contract(L', p', T') gives
customers therightto exercisefora feep' and userswho selecttheannualcontract, therefore,

forT' periods(days),oncetheflatfeeL' is paid. are morelikelyto be frequentusers.In Predic-
We assumethatconsumers can choosebetween tion2, we use attendancein theinitialmonths
flat-fee
contracts(like themonthly and annual E[v] (beforetheselectiveexit)as a measureof
withp' = 0 andpay-per-visit
contract) contracts thelikelihoodto be a frequentuser.
withL' = 0. We summarize heretheresultson
contractchoiceforthecase of standard prefer- 2 (attendance
Prediction ofmonthly
and an-
ences and rationalbeliefs.The derivationis in nual members):Theaverageinitialattendance
the working-paper version (DellaVigna and of annualmembersis higherthantheaverage
Malmendier, 2002). initialattendanceofmonthly
members:
Flat Rate versusPay per Usage.-We con- > EM[v].

EA[v]
siderfirstthe choice at enrollmentbetweena A thirdtestforthestandardmodelis whether
contract(L, 0, T) and a pay-per-visit
flat-rate consumershave rationalexpectationsabout
contract(0,p, T). Denoteby8 thedailydiscount theirattendance.
factorand by EF[v] the expectednumberof
visits(overT days)undertheflat-rate contract. Prediction
3 (forecast Theav-
ofattendance):
erageforecastofattendance
equals theaverage
1 (priceper expectedattendance actual attendance.
Prediction
at enrollment):For agentswhochoosea flat-
ratecontract,
B. EmpiricalAnalysis
L
(1) a(T) p. We test Prediction1 using the sample of
EF[V]
E[v] usersenrolledin an unsubsidized flat-rate mem-
The factora(T) (1 - -
6)T/(1 8T) is a bership in clubs 1 and 2. We analyzeseparately
time-adjustment - due to thefactthat usersin club 3, giventhelowerfee per visit.
coefficient
theflatfee L is paid up frontand theper-visit As thebenchmark measureof priceper visit,
feep is paid everyperiodbetween1 and T. For we use the priceper visitunderthe ten-visit
small T, such as T = 30 underthe monthly pass, $10, ratherthan the $12 visit-by-visit
contract,a(T) is approximately1. Equation(1) fee:theten-visit pass is cheaperforuserswith
says thatpaymentperexpected visitunder the a monthly or annual contract,giventheirat-
flat-ratecontractshould be smallerthan the tendancefrequency.7
onlyconsumers
p. Intuitively,
per-visit-fee who
attendfrequently should choose the flat-rate MonthlyContract.-For users initiallyen-
contract.Suppose,instead, thata consumer un- rolled in a monthly contract, we computethe
der the flat-rate contractattendsinfrequently priceper expectedattendance foreach month.
enoughthatthepriceperexpectedvisitL/EF[v] We limittheanalysisto thefirstsix monthsof
is greaterthantheper-visit-fee p. If thiscon- tenureto targetinexperienced users.We use the
sumerswitchedto the pay-per-visit contract sample"no subsidy"(866 individuals) toensure
withoutchangingstate-contingent attendance, comparability to standard health clubs withno
shewouldhavehigherutility. Reoptimizing the corporatesubsidy.
attendance choices,shemustbe evenbetteroff. The firstcolumnin Table 3 reports theaver-
age monthlyfees in monthsone throughsix,
AnnualversusMonthlyContract.-Thean-
nual contract A requiresa yearlycommitment.
The monthlycontractM offersthe optionto 7 The (hypothetical)averageprice per average atten-
cancelinanyperiodbutchargesa higherfeeper dance fromusingtheten-visitpass, giventhedistribution
month. Consumers who anticipatea high of attendanceforusersenrolledwiththemonthlyand the
annual is $10.91. The benefitsof a lowerprice
enough probabilityof being high-costtypes relativecontract,
to the$12-per-visitfee outweighthelosses from
=
(c c) preferthemonthly contractforitsflex- unused
coupons forthese users. The single-visitfee of
ibility.Users who believe thattheywill be $12 is targetedtowardone-timeusers such as travelling
low-costtypesprefertheannualcontract. The businessmen.
TABLE 3-PRICE PER AVERAGEATTENDANCEAT ENROLLMENT
Sample:No subsidy,all clubs

Averageprice Averageattendance Averageprice
per month permonth peraverageattendance
(1) (2) (3)
Usersinitiallyenrolledwitha monthly
contract
Month1 55.23 3.45 16.01
(0.80) (0.13) (0.66)
N = 829 N = 829 N = 829
Month2 80.65 5.46 14.76
(0.45) (0.19) (0.52)
N = 758 N = 758 N = 758
Month3 70.18 4.89 14.34
(1.05) (0.18) (0.58)
N = 753 N = 753 N = 753
Month4 81.79 4.57 17.89
(0.26) (0.19) (0.75)
N = 728 N = 728 N = 728
Month5 81.93 4.42 18.53
(0.25) (0.19) (0.80)
N = 701 N = 701 N = 701
Month6 81.94 4.32 18.95
(0.29) (0.19) (0.84)
N = 607 N = 607 N = 607
Months1 to 6 75.26 4.36 17.27
(0.27) (0.14) (0.54)
N= 866 N= 866 N= 866
Usersinitiallyenrolledwithan annualcontract,
whojoined at least
14 monthsbeforetheendof sampleperiod
Year 1 66.32 4.36 15.22
(0.37) (0.36) (1.25)
N= 145 N= 145 N= 145
Notes: Standarderrorsin parentheses. Standarderrorsfor"averagepriceperaverageatten-

dance"measurecomputedusingthebivariateDelta method.The numberof observations is
denotedbyN. An enrollment spellstartswhenever an individualenrollsin theclubandends
whenever theindividualquitsor is censored.The sample"no subsidy"consistsof thespells
in whichtheaverageadjustedmonthly feeis at least$70 if thespell startswitha monthly
contractand at least$58 if thespell startswithan annualcontract. The sampleforthet-th
monthincludesspellsthatare ongoing,notfrozen,and not miscodedat montht. For the
six-month period,thesampleincludesspellsthatare ongoing,notfrozen,and notmiscoded
in at leastone monthin theperiod.Fortheone-yearperiodin theannualcontract, thesample
includesonlyspellsthatstartedat least 14 monthsbeforetheend of thesampleperiod,and
thatwerenotprematurely terminatedbecauseof medicalreasonsorrelocation. The "average
price" in periodt is the averagefee across people enrolledin periodt. The "average
attendance" in periodt is theaveragenumber of visitsacrosspeopleenrolledin periodt.The
measurein column3 is theratioof themeasurein column1 and themeasurein column2.
withstandards errorsin parentheses.The sam- exceeds$80 in all months,exceptin thejoining

ple formonth t consists
of users who initially month whichis typically andinmonth
prorated, 3,
enrolledin a monthly contractand have had a a promotionalfreemonthfor18.6percent ofthe
continuous historyof membership up to month sample.The averagenumber ofvisitsforusersin
t undereithera monthly or an annualcontract. thetthmonthof tenure(column2) declinesfrom
Consumersdropout of the samplewhenthey 5.46 in month2 to 4.32 in month6. (Month1
cancelor arecensored.Foruserswhoswitchto coversonlypartof a month.)
an annualcontract,
themonthly feeis themonthly The thirdcolumnin Table 3 presentstheratio
shareoftheannualfee.The averagemonthly fee oftheaveragefeein montht (column1) andthe
TABLE4--DISTRIBUTION
OFATTENDANCE
ANDPRICEPERATrENDANCE
ATENROLLMENT
Sample:No subsidy,all clubs

Firstcontract
monthly, Firstcontract
annual,
months1-6 year1
(monthlyfee 2 $70) (annualfee $700)
-
Average Average
attendance Priceper attendance Priceper
permonth attendance permonth attendance
(1) (2) (3) (4)
Distribution
of measures
10thpercentile 0.24 7.73 0.20 5.98
20thpercentile 0.80 10.18 0.80 8.81
25thpercentile 1.19 11.48 1.08 11.27
Median 3.50 21.89 3.46 19.63
75thpercentile 6.50 63.75 6.08 63.06
90thpercentile 9.72 121.73 10.86 113.85
95thpercentile 11.78 201.10 13.16 294.51
N= 866 N= 866 N= 145 N= 145
Notes:The numberof observations is denotedbyN. An enrollment spellstartswhenever an

individualenrollsin the club and ends wheneverthe individualquitsor is censored.The
sample"no subsidy"consistsofthespellsinwhichtheaverageadjustedmonthly feeis atleast
$70 ifthespellstartswitha monthly andat least$58 ifthespellstartswithan annual
contract
contract.The spells in column"firstcontractmonthly, months1-6" startwitha monthly
contract.
The spellsincolumn"first annual,year1" startwithan annualcontract.
contract The
variable"priceperattendance" is definedas theratioof theaveragepriceovertheaverage
attendanceoverthefirst period(six monthsforthemonthly one yearfortheannual
contract,
contract).
averageattendance in montht (column2). This totalpaymentin thefirstsix monthsof mem-

ratiois theestimated priceperexpectedatten- bershipin a monthlycontract(column2). Only
danceformontht,(L/EF[v])a(T)inPrediction 1. 20 percentoftheindividualspaysless than$10
In each ofthesix months, we rejectthehypoth- pervisit.The remaining80 percentwouldhave
esis thatthe priceper expectedattendanceis saved moneychoosingthe pay-per-visit con-
smallerthan$10 (or than$12). The estimate tract,holdingconstant
the number of visits.
rangesbetween$14 and $16 in the firstthree
months andis higherthan$17 inthesubsequent AnnualContract.-Wealso testPrediction 1
threemonths. As a summary measure,we com- on theuserswho chose an annualcontractat
putetheratioofaveragemonthly payment (col- enrollment.We use the sample "no subsidy"
umn 1) and average monthlyattendance further touserswhojoinedtheclubat
restricted
(column2) in the firstsix monthsacross all least 14 monthsbeforetheend of the sample
individuals.8The resultingprice per average period(145 individuals).This ensuresthatwe
attendance in thefirstsix monthsof enrollment observetheannualcontract in itsentirety.9
equals $17.27,well above $10 (or $12). The bottomrowof Table 3 presents theesti-
In additionto averages,we consideralso the mationresults.The averagemonthly shareof
distributionof thesemeasuresin the firstsix the annualfee for the firstyear (column 1),
months(Table 4). We measurethe priceper is $66.32.10The aver-
adjustedfordiscounting,
attendance as theratioof totalattendanceover age number of monthlyvisits in thefirstyear
9 We excludethreeannualcontracts thatare terminated

we computetheaverageoverall
8 For each individual, beforethe twelfthmonth.Health clubs are requiredto
available monthsuntilthe sixth,withthe exceptionof acceptcancellationsformedicalreasonsor forrelocation
miscodedmonthsand monthswithfreezing. Whenaverag- morethan25 milesfromtheclubs.
10We use a
ing across individuals,we weighall individualsequally, dailydiscountfactorof0.9998,implyingan
independent of tenure. adjustmentfactorT(1 - 8)/(1 - 8T) equal to 1.037.
(column2) is 4.36. The resultingpriceperav- tentionto theunsubsidizedsampleand pooled

erageattendance (column3) of $15.22 is sub- the resultsacross clubs. We now includeall
stantiallyhigherthan$10 (or than$12). The userswhoinitially chosea monthly contractand
estimate is somewhatlower than for the disaggregate theresults by club. Separatelyfor
monthlycontract, consistentwithselectionof each club,we regresshealthclubattendance on
userswithhigherexpectedattendance intothe themonthly feeusingan Epanechnikov kernel.
annualcontract(Prediction2). Table 4 shows The measureof attendance is theaverageatten-
thedistributionacrossusersof attendance (col- dance per monthin the firstsix months.We
umn3) andofthepriceperattendance (column cross-validate clubbyclubwitha gridsearchto
4) in the firstyearof an annualmembership. compute optimalbandwidth
the fortheprice.12
Only24 percentpay less than$10 pervisit. In club 1 (Figure 1A), the average monthly
attendancefromthekernelregressionlies be-
Finding1 (priceper expectedattendance at tweenthreeand fiveand is increasingin price,
enrollment):Users who choose an unsubsi- althoughthe estimatesare not very smooth
dizedflat-ratecontract pay a priceper average given the small bandwidthsuggestedby the
attendanceofover$17 in themonthly contract cross-validation.We use theaverageattendance
and over$15 in theannualcontract.Theshare fromthekernelregression to computetheratio
ofuserswhopay expost less than$10 per visit ofpriceandaverageattendance foreachlevelof
is 20 percentin themonthly contractand 24 price(FigureIB). The priceperaverageatten-
percentin theannualcontract. dance is significantly higherthan$10 forusers
paying monthly in excess of $53. The
a fee
Size of theEffect.-As a monetary measure estimates forclub2 arecomparable(Figures1C
of the deviationfromthe standardmodel,for and ID) and somewhatsmoothergiven the
monthly and annualmemberships we compute largeroptimalbandwidth. In club3 thepriceper
thedifference betweenactualexpensesoverthe averageattendance is higherthantheper-visit
whole enrollment spell and imputedexpenses feeof$8 foruserspayinga feein excessof$46
forthe same numberof attendances withten- (FigureIF).
visitpasses."1Thismeasureunderstates thesav- 2. Underrecording of attendance.The high
ingsfrompayingpervisitsincetheagentscould priceperattendance couldresultfromunderre-
reoptimize theirattendance. The "averageloss" cordingof attendance due to a faultycomputer
measureis positiveiftheuserwouldhavesaved system or moralhazard problemswiththestaff.
moneypurchasing ten-visit
passes,andnegative Healthclub employeesmayalso seekto avoid
otherwise. We use thesample"no subsidy"for queues of users waitingto swipe. The three
spellsthatstartbeforeOctober1997. healthclubs in our samplehad incentivesto
The averageloss perspellis $614 foragents addresstheseproblems,sincetheyprovidere-
initiallyenrolledin a monthlycontract.This portsofattendance to thecorporations subsidiz-
amountis 43 percent oftheoverall$1,423spent ing employeememberships. They thereforeput
on thehealthclub membership. For agentsini- in place one of themostadvancedand reliable
tiallyenrolledin an annualcontract, thereis a systemsto trackattendance in theindustry.Un-
small,insignificant gain of $1. like in mostclubs,a front-desk employeecol-
The observeddeviationfromthe standard lects the cards fromthe membersand swipes
modelhas largemonetary consequencesforus- themwhile the memberis exercising.There-
ers in the monthlycontract.For users in the fore,cardswipingdoes notgenerate queues.We
annualcontract, theautomaticexpiration mod- also witnessedtheprocedureif a memberhas
eratesthepossiblelosses. forgotten thecard:theemployeelooksthename
up in the computer and recordstheattendance.
Robustness.-Wenow checktherobustness Thus, while errorsmay occur in both direc-
of Finding1. tions-failureto swipe and double swiping-
1. Sample.Thus far,we have restricted at- the healthclub data used in our analysisare
unusuallyaccurate.
" This measuretakes into accountthe
potentialloss
associatedwithnotusingfullya ten-visit
pass.
12
AdrianPaganand AmanUllah (1999), pp. 110-20.
Average attendance in club 1 Price per averageattendancein club 1

6 20
5 17.5
15
4
12.5
attendance
3
attendance 10
av.
2 7.5
per 5
1 2.5
Monthly
20 30 40 50 60 70 80 Price 20 30 40 50 60 70 80
price price
Mbnthly
Monthly
A. Kernelregression on
ofattendance B. Priceperaverageattendance as a function
price(club 1,bandwith
4) ofthemonthly price(club 1,bandwith 4)
Averageattendancein club 2 Price per averageattendancein club 2

6 20
5 17.5
15
4
12.5
attendance
3
attendance 10
av.
2 7.5
per 5
1 2.5
Monthly
20 30 40 50 60 70 80 Price 20 30 40 50 60 70 80
Mbnthly price price
Monthly
C. Kernel regression onmonthly
ofattendance D. Priceperaverageattendance as a function
price(club2. bandwith
16) of themonthlyprice(club2, bandwith16)
Averageattendancein club 3 Price per average attendancein club 3

6 12
5 10
4 8
attendance
3
attendance 6
av.
2 4
per
1 2
Monthly
20 30 40 50 Price 20 30 40 50
vbnthlyprice Monthlyprice
E. Kernel on
ofattendance
regression attendance
F. Priceperaverage as a function
price(club3,bandwith
16) ofthemonthlyprice(club3,bandwith 16)
FIGURE 1. AVERAGEATTENDANCEAND PRICE PER AVERAGEATTENDANCE(KERNEL REGRESSIONS)
Notes: Pointestimatesand 95-percentconfidence intervalsplotted.The sampleis all individualsinitiallyenrolledwitha

monthly The individualpricevariableis theaveragepriceoverthe firstsix months.The individualattendance
contract.
variableis theaverageattendanceoverthefirstsix months.FigureslA, IC, and lE showa kernelregression of attendance
on priceusingan Epanechnikov kernel.The bandwidth is determinedby cross-validationwitha gridsearchseparately for
each club.FiguresIB, ID, and IF showtheratioof thepriceand theexpectedattendance predictedforthatpriceusingthe
kernelregression.Confidenceintervalsare derivedusingtheDelta method.
As supporting evidence,we can testwhether TABLE5-AVERAGEATTENDANCEINMONTHLY

AND
randomevents such as computercrashesor ANNUALCONTRACTS
lazinessof employeesaffectsub- (Sorting)
idiosyncratic
stantially accuracyoftheattendance
the record. Averageattendance
duringthen-th
We calculatethefraction ofmembers attending monthsinceenrollment
on eachdayin thesampleandregressiton a set
Sample:All clubs
of controls:6 day-of-the-week dummies,11
monthdummies,3 yeardummies,and 15 holi- Month2 Month3 Month4
day dummies.If recording precisionis highly Monthlycontract 5.507 5.005 4.614
variable,theR2ofthisregression shouldbe low. (0.0668) (0.0696) (0.0709)
TheR2oftheregression forclub 1,instead,is as N = 6219 N = 5693 N = 5225
Annualcontract 5.805 5.629 5.193
highas 0.8785,withtheday-of-the-week dum-
(0.1885) (0.1934) (0.1913)
mies explainingmostof thevariance.The re- N= 862 N= 841 N= 817
gressionforclubs2 and 3 yieldan evenhigher
R2 of 0.8915.13The highexplanatory Notes: Standarderrorsin parentheses.The numberof ob-
powerof servationsis denotedbyN. An enrollment
theseregressions spellstarts
when-
suggeststhatdailyvariation in
everan individualenrolls(orreenrolls)
in theclubandends
recording precisionis limited. whenevertheindividualquitsor is censored.The spellsin
3. Ex postsubsidies.Some HMOs reimburse row"monthly contract"
startwitha monthly contract.The
memberspartially forhealthclubexpenses.To spellsinrow"annualcontract" startwithan annualcontract.
theextentthatthesereimbursements makethe The samplein monthn includesspellsthatareongoing,not
frozen,and notmiscoded.
annualand themonthly contractcheaperrela-
tive to the pay-per-visit contract,theyinduce
usersto chooseflat-rate contracts. However,the dized membersof a monthly contractpay 70
HMOs in thestatewherethethreeclubsoperate percentin excess of the$10 fee.
offer discountseitheron theinitiationfeeonly,or
to bothflat-rateandpay-per-usage contracts.14 To test Prediction2 on the initialsorting
4. Membership benefits. Consumers'choice betweenthemonthly and theannualcontracts,
of themonthly or annualcontract couldbe due we comparethe averagenumberof visitsin
to contract-specific membership benefits.The months2, 3, and 4 of tenureforindividuals
only benefitnot available underthe per-visit initiallyenrolledin themonthly and in thean-
payment, though,is theoptionto rentan over- nualcontract.15 Giventhatthepricepervisitp
nightlockerat an extrafee,andonly9.4 percent is zero forbothcontracts,differencesin atten-
of theusersever renta locker.If we exclude danceshouldreflect differences
in theexpected
these users,the resultson price per average futureattendance cost.Column1 of Table 5 re-
attendance forthemonthly contractdo notvary. portstheresultsforthewholesample.In each
Overall,we observea robustdeviationfrom month,expectedattendance is higherunderthe
Prediction1. Nonsubsidizedusers enrolledin annual thanunderthe monthlycontract,and
contracts withflatfeespay a priceperaverage significantlyso in months3 and 4. Overall,
attendance thatis significantly higherthanthe averageattendance in months2 to 4 is 10 per-
per-visitprice available as an alternativecon- centhigherundertheannualcontract. The mag-
tract.The resultis robustto thetypeofcontract nitude of this differenceis comparableto
(monthly or annual),thesample(theamountof variationin averageattendance by age groups
subsidy),and theclub considered.The results and by gender.Whenwe breakdownthesam-
do notappearto dependon measurement error, ple into24 age-gender-month cells,averageat-
ex post subsidies,or unobservedbenefits. The tendanceis higherundertheannualcontract in
deviationfromPrediction1 is large:unsubsi-
5 We exclude the firstmonthbecause attendanceis

proratedoverthenumberof effectivedaysof membership,
13 Detailedresultsare availablein DellaVignaand Mal- and the proratingprocedureis slightlydifferent
for the
mendier(2002, AppendixTable 1). annual and the monthlycontract.We do not extendthe
14
We reporttheresultsin AppendixTable 3 in Della- comparisonto monthsafterthe fourth,since users who
Vigna and Malmendier(2002). We thankNancyBeaulieu experiencea highcostcan quitunderthemonthly contract
forproviding thelistof HMOs. butnotundertheannualcontract.
20 cells out of 24. Even aftercontrolling

for vious experience,you expect to attendon
someheterogeneity, individuals
withhigherat- average five timesper month(about once a
tendanceare morelikelyto choose theannual week),ifyou enrollin a monthly membership.
contractat enrollment. You plan to attendthehealthclub throughout
the nextyear.Would you choose a monthly
Finding2 (attendanceofmonthlyand annual contractwitha monthly feeof$70 permonthor
members):Averageattendancein months2-4 ten-visitpassesfor$100 (each visitcosts$10)?
is 10 percenthigherundertheannualcontract This questionattempts to measurewhether us-
thanunderthemonthly contract. ers endowedwithrealisticexpectations about
While consumers'choice betweenflat-rate attendance would stilloverwhelmingly choose
contracts anda per-visit feeis hardtoexplainin contracts.
flat-rate In thehypothetical scenario,
the standardframework(Finding 1), their 18 consumersout of 48 preferthe monthly
choicebetweenthemonthly andannualcontract contract,and 30 prefertheten-visit pass. With
(Finding2) is consistent with standardprefer- realisticexpectationsabout attendance, there-
ences and beliefs.Consumerssortaccordingto fore,themajority to
prefers pay per visit.
theexpectedattendance. Thesefindings suggestthathealthclubmem-
Finally,we elicittheexpectations of health bers have unrealisticexpectationsabout their
club membersabouttheirfuture attendance us- futureattendance.One shouldtakeresponsesto
a
ing survey of 48 randomly chosen respondents hypothetical questionswithcaution,however,
interviewed in a mall.16The mallis notneara particularlybecause the surveysamplediffers
healthclub,so therespondents are notselected fromthehealthclub sample.
on healthclubattendance. We ask theonesthat
reportto be members or to attenda healthclub ChoiceoverTime
III. Contract
how oftentheyexpectto visittheirhealthclub
in thenextmonth,September.17 This question of theStandardModel
A. Predictions
attempts to measure directly whether health
clubusershaverationalexpectations. Although In theprevioussection,we analyzedconsum-
we do not observeactual attendanceamong ers' initialchoice of membership contract.In
these48 surveyrespondents, it is unlikelyto thissection,we comparetherenewaldecisions
differ substantiallyfrom attendance in ourdata- of monthly and annualmembers.We takead-
set, whichis veryrobustacross demographic vantage of two differences in therenewalpro-
subgroups.Across 24 (gender)*(club)*(age) cedurebetweenthetwoflat-rate contracts.First,
subgroups, theaveragemonthly attendance over therenewaldefaultdiffers. The monthly con-
themembership is lowerthan4.75 visitsfor23 tractis automatically renewedand requiresa
out of 24 groups,withan overallaverageof (small)effort-sending a letteror cancellingin
4.17 monthly visits. person-in orderto discontinuethe member-
ship.The annualcontract automatically expires
Finding3 (forecastsof attendance):The av- after12 months,and cancellationrequiresno
erageforecastednumberofmonthly visits,9.50 effort. Second,memberswitha monthly con-
(s.e. 0.66), is more than twice as large as av- tract can cancel at any month, while members
erage attendance, 4.17. withan annualcontractare committed for a
The overestimation displayedbythesubjects year.We evaluatethe impactof thesediffer-
matchesFinding1. If healthclub consumers enceson cancellation lag,survivalprobabilities,
expect to attend9.5 times per month,they and averageattendance over timein a simple
should indeed choose a flat-rate contract, rather setup withstandard preferences andbeliefs(de-
thanpayingpervisit. tailsarein DellaVignaandMalmendier, 2002).
We also present thesubjectswiththefollow-
ing scenario:Supposethat,based on yourpre- Calibration.-We illustrate theeffectof the
renewaldefaulton cancellation withthefollow-
16 The interviews
ing calibration.Consider two agents withiden-
weredone in August2002 in Walnut
Creek,California.
tical preferences and identical effortcosts of
17 In our sample,averageattendance in Septemberis 5 attendance. One is enrolledin themonthly con-
percent lower thanovertherestof theyear. tract,the otherin theannual contract.At the end
of thecontractual period,each consumer can ei- In orderto calibratetheupperboundforthe

therrenewwitha monthly or an annualcontract, expecteddelayE[T], we maketheconservative
or switchto thepay-per-visit contract (whichis assumptionsk.2 = $10 (corresponding to the
to
equivalent dropping out). Denote with s the value of one hourof timeon a calm day) and
(possiblynegative)dailysavingsfromswitching k = 0. For these values, an individualwho
to thepay-per-visitcontract,whichwe assumeto expectsnotto attendthehealthclub anymore
be deterministic.18
Thesavingss aredecreasing in (s = $70/30 = $2.33) delays on averageno
thefuture healthclubattendance. Forexample,a morethanmax(4,10/2.33),thatis,4.3 days.An
member witha monthly feeof $70 whoexpects individualwho expectsto attendfourtimesa
notto attendanymorehas s = $70/30= $2.33. month(s - (70 - 40)/30 = $1) delays on
Denoteby8 thedailydiscount factor andbykthe averageno morethantendays.Underthestan-
one-time effort
costofcancellation. dardmodel,therefore, monthly memberswith
Undertheannualcontract, thiscost is zero, low expectedattendance switchalmostimme-
and theagentdropsoutif 8s/(1- 8) > 0, that diatelyto payment pervisit.The switchingbe-
is, fors > 0. Underthemonthly contract, the haviorof monthly membersis thussimilarto
costk is stochastic,withi.i.d.drawseachperiod the one of annualmembers.We summarizea
(day)fromthec.d.f.F. In eachperiod,theagent firstprediction
on contractchoiceovertime.
can switchto paymentpervisitat therealized
cost k or postponeswitching.The benefitof Prediction4 (cancellationlags under the
postponement is the optionvalue of a lower monthlycontract):Low attendersunderthe
futurerealizationof k, while the cost is the monthlycontract
delaycancellation
forat most
foregone savingss. The valuefunction V solves a fewdays.
V = E[max(-k, -5s + 6V)]. The solutionof
theagent'sdynamicprogramming problemis a SurvivalProbability.-Wenow comparethe
threshold level k*. The agentswitchesto pay- renewalbehaviorformonthly and annualcon-
mentpervisitiftherealizedtransaction costis tractswhenbothcontracts are up forrenewal,
smallerthank*. Withoutsolvingfor k*, we i.e., after12 or 24 months.The survivalproba-
derivean upperboundon theexpectednumber bilitySj,tis the probability thata consumer
of periods(days) untilcancellation,E[TJ = initiallyenrolledin contract j (equal toMonthly
(1 - F(k*))/F(k*),undertheassumption 8 = 1. orAnnual)is stillenrolledin one oftheflat-rate
In SectionIIIB we thencomparethepredicted contracts-eithermonthlyor annual-aftert
E[7Twithan empiricalproxy.Denotebyk.2the months, witht = 12, 24. For example,SM,12 is
bottomquintileof thecost distribution, thatis, theprobability thata monthly memberhas not
k.2- F-1(.2), anddenotebyk thelowerbound switchedto paymentper visit by month12.
of the cost distribution. Then E[T] mustbe Similarly, SA,12is theprobability thatan annual
smallerthanmax(4,[k.2- k]/s).The derivation memberrenewswithan annualor a monthly
is as follows.For a cost realizationof k.2,the contract after12 months.
agentseitherswitchtopayment pervisit,ornot. Sortingat enrollment (Prediction2) implies
Iftheydo switchfork = k.2,theexpecteddelay thatuserswho selectedintotheannualcontract
is at most(1 - F(k.2))/F(k.2) = 4 days.If they are ex post morelikelyto be frequent users.
do notswitchfork = k.2,revealedpreferences These usersare morelikelyto renew-either
implythatthebenefit ofdelay-boundedabove witha monthly or withan annualmembership.
by k.2 - k-must be higherthanthe cost of This increasesSA,trelativeto SM,t.Cancellation
delay,E[fTs.This yieldsthebound. costs forthe monthly contract, instead,act to
increaseSM,trelativeto SA,t.The calibrations
above,however, suggestthatin a standard model
18 For simplicity,
we are neglectingthe learningover theeffect ofcancellationcostsis verysmall.We
timeaboutthesavingss. In a modelwithlearning, agents therefore expectthesorting effect to dominate.
maywaitto cancelfortworeasons.First,as we capturein
thecalibrations,theymaywaitfora lowerrealization of k.
Prediction5 (survivalprobability):The sur-
Second,theymay wait fora lowerrealizationof s. Our
calibrationsshowthatthepredictionsare robustto thefirst vivalprobability
afteroneand aftertwoyearsis
optionvalue argument. Addinga secondoptionvalue re- higherforagentswhoinitiallychosetheannual
gardings is unlikely
to changethepredictionssubstantially. membership thanforagentswhoinitiallychose
themonthlymembership:SA,t> SM,,for t = 12, periodofnonattendance.We restrict

thesample
24. to userswho paid no initiation
fee, to ensure
minimalcostsof rejoining.20
Attendance overTime.-Over time,monthly
and annual memberslearn about theiratten- Finding 4 (cancellationlags under the
dancepatterns, and thereforeabouts. Learning monthlycontract): On average, 2.31 full
induces selectiveexit of individualswithex monthselapse betweenthelastattendanceand
postlow attendance. Defineas stayersindivid- contract termination formonthly members, with
enrolledin a flat-rate
uals initially who
contract associatedmembership payments of $187. This
do not switchto a pay-per-visit contractafter lag is at leastfourmonths for20 percentofthe
the firstyear. Attendanceof stayersin later users.
periodsshouldbe higherthanattendance of the Even thoughthetransaction costsof cancel-
initial group, since the low-attenders have lationarelikelyto be lowerthan$15 (timecost
switchedto payingper visit.In the standard of sendinga cancellationletteror visitingthe
model,thisprediction holdsin similarformfor club),usersspendon average$187 in member-
boththeannualand themonthly contract.19 shipfeesaftertheirlastattendance. Thislengthy
delayis at oddswiththecalibrations in Section
Prediction 6 (expectedattendance overtime IIIA, whichimplyan averagedelayof at most
for annual contract):Amongusers initially fiveto tendays.
enrolledin an annual contract,the expected
attendancein thesecondyearamongstayersis SurvivalProbability.-TotestPrediction5,
higherthantheexpectedattendancein thefirst ideallywe would computethe percentageof
yearfor theinitialgroup. monthly membersand of annualmembersstill
enrolledone year afterthe initialenrollment.
Prediction 7 (expectedattendance overtime We needto takeintoaccount,however,that(a)
for monthlycontract):Amongusers initially thefirst monthin a contract is prorated, so every
enrolledin a monthly contract,the expected annualmemberis stillenrolledin thethirteenth
attendance amongstayersshouldincreasefrom (calendar)month;and (b) 11.5 percentof an-
monthto month. nualcontracts lastone additionalmonthdue to
promotions. therefore
We definethe survival
B. EmpiricalAnalysis probability as the share of membersstillen-
rolledin a flat-rate contract at thefifteenth cal-
CancellationLags.-To testPrediction 4, we endarmonth.In orderto estimatethesurvival
adopt a conservativemeasureof cancellation probability, we set survivalsi to 1 ifindividual
delayE[T] for low attenders.We measure this i is enrolled in thefifteenth monthsinceenroll-
lag as the number of fullmonths between the ment, and 0 otherwise.21 We use thefollowing
lastattendance and contractterminationforus- empiricalspecification:
ers witha monthly contractat thetimeof ter-
mination. For example,if an agentattendsthe (2) si = 1 ifs*= a + yM,+ BX,+ si> 0,
lasttimeon March10 and cancelson April5,
we countthe51 days betweenlast attendance whereej is normallydistributed and Mi is a
(March 10) and membership termination(April dummy variably thatequals 1 if the firstcon-
30) as one fullmonth.This is likelyto under- tractforindividuali is a monthly contract, and
statethetruecancellation lag forlow-attenders 0 otherwise. The vectorof controlsX includes
on two grounds:(a) the measuredoes not in- gender,a quadraticfunction of age, a dummy
clude monthswithlow, but positive,monthly
attendance;and (b) membersmay attendthe
clubone lasttimein orderto cancelaftera long 20 We includeuserswithan unsubsidized membership
(monthlyfee higherthan$70 or annualfee higherthan
$700) whojoinedtheclubwithina yearsincethestartofthe
sample(April1997).
19
The maindifference the
is thatfortheannualcontract measure,si = 1,appliesalso to members
21 The survival
comparison can be madeonlyacrossyears,sincetheselec- quittheclubbuthave reenrolled

who have temporarily by
tiveexitis possibleonlyevery12 months. monthsincetheirinitialenrollment.
thefifteenth
TABLE 6---PROBIT OF RENEWAL DECISION
Sample all clubs

controls,
Non-missing No subsidy,all No subsidyII, all
Enrollment
at Enrollment
at at
Enrollment Enrollment
at Enrollment
at
Dependentvariable 15thmonth 16thmonth 27thmonth 15thmonth 15thmonth
Controls+ Controls+ Controls+ Controls+ Controls+

No time No time No time No time No time
controls dummies controls dummies controls dummies controls dummies controls dummies
Controls (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Dummyforenrollment 0.0483 0.066 0.0337 0.0546 0.0011 0.0271 0.0634 0.0694 0.091 0.1019
withmonthly contract(0.0218)** (0.0221)*** (0.0221) (0.0224)** (0.0260) (0.0254) (0.0479) (0.0501) (0.0368)** (0.0372)***
Female -0.0438 -0.0425 -0.0762 -0.0187 -0.0186
(0.0143)*** (0.0144)*** (0.0165)*** (0.0394) (0.0277)
Age 0.0133 0.0155 0.0228 0.0304 0.0229
(0.0046)*** (0.0046)*** (0.0052)*** (0.0111)*** (0.0077)***
Age squared -0.0001 -0.0002 -0.0002 -0.0003 -0.0003
(0.0001)** (0.0001)** (0.0001)*** (0.0001)** (0.0001)***
Corporatemember 0.0728 0.0676 0.0676 0.234 0.0024
(0.0144)*** (0.0145)*** (0.0167)*** (0.0471)*** (0.0319)
Studentmember -0.1123 -0.0924 -0.0894 0.1966 -0.1173
(0.0503)** (0.0519)* (0.0567) (0.2669) (0.0666)*
Monthand yearof
enrollment X X X X X
Baselinerenewal
for
probability annual
contract 0.3983 0.4017 0.3906 0.3932 0.2609 0.2589 0.4701 0.5537 0.4252 0.4347
Numberof observationsN = 4,962 N = 4,962 N = 4,833 N = 4,833 N = 2,860 N = 2,860 N = 715 N = 715 N = 1,384 N = 1,384
Notes:Standarderrorsin parentheses. The numberof observations is denotedby N. Entriesin thetablerepresent themarginalcoefficients

of theprobitin response
to an infinitesimalchangein thecontinuous variables,anda discretechangeforthedummyvariables.An enrollment spellstartswhenever
an individualenrollsin the
cluband endswhenever theindividualquitsor is censored.The sample"non-missing controls"consistsof theindividuals forwhomthedemographic controls"age"
and "female"are available.The sampleis further restrictedto individuals
whojoin at least 15 monthsbeforetheend of thesampleperiod.The sample"no subsidy"
is a restriction
of thesample"non-missing controls"to individualspayingon averagea per-month feeof at least$70. The sample"no subsidyII" is a restriction
of
thesample"non-missing controls"
toindividuals payingon averagea per-month feeofat least$60. The controls"monthandyearofenrollment" indicatethattheprobit
contains11 dummiesforthemonthof enrollment and 4 dummiesforyearof enrollment. The baselinerenewalprobability fortheannualcontractis thepredicted
renewalprobability forindividualsstartingwithan annualcontract.
* Significant
at the 10-percentlevel.
** Significantat the5-percentlevel.
*** Significantat the 1-percent
level.
forcorporate membership, a dummyforstudent geneityreducesthedownwardbias on theco-

membership, 11 dummies for themonth, and 4 efficient
due to theinitialsorting
(Prediction2).
dummiesfortheyearofenrollment. We restrict For example, individuals enrolled with a
thesampleto userswhojoinedtheclubat least monthly contract are significantly
youngerthan
15 monthsbeforetheendofthesampleperiod. users withan annualcontract(Table 2), and
We also dropuserswithmissingvalues of a youngpeopleareless likelytorenew(column2
controlvariable,as well as spellsthatare cen- ofTable 6). Failingto controlforage biasesthe
soredbeforethefifteenth month. coefficient
j downward.
The coefficient y capturesthe differencein
survivalprobability betweenusersinitiallyen- Finding5 (survivalprobability):Thesurvival
rolledin a monthly contract and usersinitially probabilityafter14 monthsfor the monthly
enrolledin an annualcontract. The coefficients contractis 17 percenthigherthanfor thean-
in Table 6 are themarginalchangein response nual contract.
to an infinitesimal change in the continuous It is worthreiteratingthat"survival"includes
independent variables,anda discretechangefor renewalwitheitherof the two flat-rate con-
theindependent dummyvariables.In thespec- tracts.We can thusruleout thatliquiditycon-
ificationwithout controls(column1), j is pos- cerns(i.e., thedifficultyof makingan annual
itiveand significant. Enrollment in a monthly payment all at once), and concernsabout a
contractincreasessurvivalby 4.83 percentage secondlong-term commitment forone yearin-
pointsrelativeto the baseline rate of 39.82 duce annualmembersto quit.
percentsurvivalwiththeannualcontract. The
introduction of thecontrolsincreasesthecoef- Robustness.-In columns3 through10 of
ficient '/from0.0483 to 0.0660 (column2). Table 6, we checktherobustnessofthefindings.
Controlling forsomeof theunobserved hetero- We measureenrollment at the sixteenth
month
afterthejoiningdateas an alternative measureof montht is givenby usersin the"no subsidy"

survival.Withdemographic controls, usersini- samplewho havejoined withan annualmem-
tiallyenrolled in the monthly contract are 5.46 bershipand are still enrolledwitha flat-rate
percentage points more likelyto be enrolled inthe contractin the t-thmonthof tenure.Over the
sixteenth month(column4) thanusersinitially first 12 months, thepriceperaverageattendance
enrolledin theannualcontract. Alternatively, we increasesfrom12.3 to 19, as negativeshocks
measureenrollment at thetwenty-seventh month accumulate. Atrenewal(months13 and 14),the
afterthejoiningdate (columns5 and 6). The priceper attendance is halved.
estimateofyis positive, not
although significantly For spells startingwitha monthly contract,
differentfromzero. thesampleforaverageattendance at montht is
We also replicatetheresultsofcolumns1 and givenby theusersin the"no subsidy"sample
2 of Table 6 forthesample"no subsidy"(col- who have joined witha monthly membership
umns7 and 8) and forthe largersample"no and are stillenrolledwitha flat-ratecontract in
subsidy II" of users who pay at least $60 per the t-thmonth of tenure.Columns 1 to 3 of the
monthin themonthly contract, or$600 peryear top partof Table 7 show the resultsby six-
intheannualcontract (columns9 and 10). In the monthgroups.
smallersampletheestimatedj has a sim-
first,
ilar magnitudeas in the benchmark specifica- Finding7 (averageattendance overtimein
tion, but the estimates are imprecise. In the monthlycontract): Average monthlyatten-
second, wider sample, the coefficient j is positive dance in thefirstsix monthsofa monthly con-
and large(0.1019withcontrols), as well as pre- tract,4.36, is 20 percenthigherthanin thenext
ciselyestimated. Overall,theresultson survival six monthsand is significantly higherthanin
probability are robustto themeasureof pastat- any of the later six-month periods among
tendance, themeasure ofsurvival, andthesample. stayers.
The priceperaverageattendance in thefirst
Attendance overTime.-Finally,we testPre- six months,$17.27, is significantly lowerthan
dictions6 and 7 on the dynamicsof average in anyof thelatersix-month periods.23As Fig-
attendance.We firstconsiderspells starting ure2B shows,thepriceperaverageattendance
withan annualcontract in thesample"no sub- increasesoverthefirsttenmonthsfromabout
sidy" and lasting at least twoyears.22We dis- $15 to about$20, and remainsconstantthere-
play the results in columns 1 to 3 ofthebottom after.The resultsare similarin thewholesam-
part of Table 7. ple (columns4 to 6).
overtimein
Finding6 (averageattendance Summary.--Unsubsidized monthly members
annual contract):In theannual contract,av- spend on average $187 for periodswith no
erage monthly attendance for theinitial group attendance beforecancellation (Finding4), de-
lowerthan spitesmalltransaction
in thefirstyear,4.36, is significantly costsof cancellation.In
for stayersin thesecondyear,5.98. addition,afteroneyear,moremonthly members
The difference in attendance betweenthetwo are still enrolledin a flat-rate contractthan
is
groups large: the baseline group in the first annual members (Finding 5). Surprisingly,
year attendson average27 percentless than memberswhopay higherfeesfortheoptionto
stayersin the second year.Consequently, the canceleachmontharemorelikelytorenewpast
priceper averageattendancein the firstyear, a year.This resultdoes not arise because of
$15.22,is significantly higherthaninthesecond sortingbutdespitesorting(Finding2). The re-
year,$11.32.Theresults forthewholesampleare sultis economically and statistically
significant
comparable(columns 4 to 6 of Table 7). and robust across specifications.Finally,aver-
Figure2A showsthewithin-year dynamics of age attendance decreasesby20 percent between
thepriceperaverageattendance. The sampleat thefirstsix monthsand thenextsix monthsin
22 The results ifwe restrict

remainunchanged thesample 23
ifwe restrict
Theresultsremainunchanged thesample
to userswhorenewwithan annualcontract
further after12 touserswhohavehada monthly
further contractat all times
months. untilmontht.
TABLE7-ATrENDANCE
ANDPRICEPERAVERAGE
ATTENDANCE
OVERTIME
Sample:No subsidy,all clubs Sample:All clubs

Average Averageprice Average Averageprice
Averageprice attendance peraverage Averageprice attendance peraverage
permonth permonth attendance permonth permonth attendance
(1) (2) (3) (4) (5) (6)
Usersinitially
enrolledwitha monthly
contract
Months1-6 75.26 4.36 17.27 44.77 4.33 10.35
(0.27) (0.14) (0.54) (0.23) (0.05) (0.13)
N = 866 N = 866 N = 866 N = 6,875 N = 6,875 N = 6,875
Months7-12 81.89 3.63 22.56 52.81 3.91 13.50
(0.26) (0.17) (1.07) (0.31) (0.07) (0.26)
N = 577 N = 577 N = 577 N = 3,867 N = 3,867 N = 3,867
Months13-18 81.27 3.89 20.88 52.99 4.41 12.03
(0.34) (0.23) (1.26) (0.41) (0.10) (0.29)
N = 331 N = 331 N = 331 N = 2,131 N = 2,131 N = 2,131
Months19-24 81.82 3.97 20.59 53.95 4.45 12.12
(0.37) (0.31) (1.62) (0.59) (0.14) (0.39)
N = 189 N = 189 N = 189 N = 1,130 N = 1,130 N = 1,130
Usersinitiallyenrolledwithan annualcontract
Year 1 66.32 4.36 15.22 44.16 4.19 10.55
(0.37) (0.36) (1.25) (0.69) (0.16) (0.45)
N = 145 N = 145 N = 145 N = 598 N = 598 N = 598
Year 2 67.70 5.98 11.32 46.72 5.82 8.02
(1.07) (0.87) (1.67) (1.68) (0.45) (0.68)
N= 35 N= 35 N= 35 N= 108 N= 108 N= 108
Notes: Standarderrorsin parentheses.Standarderrorsfor"averagepriceperaverageattendance" measurecomputedusing

thebivariateDelta method.The numberof observations is denotedbyN. An enrollment spellstartswhenever an individual
enrollsin theclub and endswhenever theindividualquitsor is censored.The sample"no subsidy"consistsof thespellsin
whichtheaverageadjustedmonthly feeis at least$70 ifthespellstartswitha monthly contract,andat least$58 ifthespell
startswithan annualcontract. For thesix-month periods,thesampleincludesspellsthatare ongoing,notfrozen,and not
miscodedin at leastone monthin theperiod.For year1 in theannualcontract, thesampleincludesonlyspellsthatstarted
at least14 monthsbeforetheendofthesampleperiod,and thatwerenotprematurely terminatedbecauseof medicalreasons
or relocation.
For year2, thesampleincludesonlyspellsthatstarted withan annualcontract at least26 monthsbeforethe
endof thesampleperiod,and thatlastedat least25 months.The spellsin row"first contractmonthly" startwitha monthly
contract.The spellsin row"first
contractannual"startwithan annualcontract. The "averageprice"inperiodt is theaverage
fee acrosspeopleenrolledin periodt. The "averageattendance" in periodt is theaveragenumberof visitsacrosspeople
enrolledin periodt. The measurein column3 is theratioof themeasurein column1 and themeasurein column2.
themonthly contract(Finding7), a pattern

op- hardto reconcilewiththestandard framework.
posite to the one foundfor annual contracts Consumerspay $17 per expectedattendance
(Finding6). underthemonthly contract(Finding1) and ap-
pearto overestimatefuture attendance(Finding
IV. Interpretations 3). In addition,monthlymemberswithlow at-
tendance accumulatedelays in cancellation
We now considerwhichassumptions about (Finding4), leadingto a higherrenewalproba-
consumerpreferences and beliefscan explain bilityafterone yearrelativeto theannualcon-
the seven empiricalfindings,summarizedin tract(Finding5). Finally,averageattendance
Table 1. Two findingsare consistentwithstan- among survivorsdecreasesover timefor the
dardeconomicmodels.Healthclubs members monthlycontract(Finding7). This findingis
use information on expectedfutureattendance puzzlingsincewe observetheoppositepattern
to sortinto the monthlyand annual contract fortheannualcontract (Finding6).
(Finding2) andtosortoutoftheannualcontract We firstconsiderif enrichedversionsof the
(Finding6). The otherfindings,instead,are standardmodel (Interpretations 1 and 2) can
A. Priceperaverageattendance
withannualfee> $700)
(Annualcontracts
25
20
attendance
15
10
average
per
5
Price
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Month
B. Priceperaverageattendance
(Monthlycontracts
withmonthlyfee> $70)
25-
20-
attendance
15
10
average
per
5
Price
0-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Month
2. PRICEPERAVERAGE
FIGURE OVERTIME
ATrrENDANCE
Notes:Pointestimatesand 95-percent confidenceintervalsplotted.Figure2A plotstheratio
of averagepriceand averageattendance at monthn oftenure.The sampleis "no subsidy,all
clubs"forindividualsinitiallyenrolledin theannualcontractand stillenrolledat monthn of
tenure.Figure2B plotstheratioofaveragepriceandaverageattendance atmonthn oftenure.
The sampleis "no subsidy,all clubs"forindividuals enrolledinthemonthly
initially contract
and stillenrolledat monthn of tenure.Standarderrorsfortheratioof averagepriceand
averageattendance computedusingthebivariateDelta method.
explaintheadditionalfindings.We thendiscuss payments.24 Overthesmallamounts ofmoney

nonstandard preferences andbeliefs(Interpreta- requiredfor a monthly contract, however,
In theend,
tions3 to9) as possibleexplanations.
we summarizewhichexplanationsrationalize
all theempiricalfindings. 24 Thisresultrequiresa utility thatis additively
function
Underthe
1. Riskaversion.Userswho are riskaverse separablein incomeandhealthclubisnet benefits.
assumption thattheutilityfunction a concavefunction of
in incomemayprefera flat-rate contract to the thesumof incomeand healthclubnetbenefits, thepredic-
pay-per-visitcontract(Finding1) because the tionsare reversed:morerisk-averse agentsare morelikely
formercontractminimizesthevarianceof the to choosethepay-per-visit contract.
healthclubmembers shouldbe locallyriskneu- monthly members(Finding7). Mean reversion,

tral(MatthewRabin,2000). however,explainsneitherthe initialoverpay-
2. Transactioncosts. Users may choose a ment(Finding1), nor the difference between
flat-ratecontracteven thoughtheyattendlittle renewalpatterns of monthly and annualmem-
(Finding 1) if payingper visit entailslarge bers(Findings5 and 6).
transaction costs.Forthesamereason,theymay 5. Limitedmemory.Rational agents with
also postponethe cancellationof a monthly limited memorymay fail to cancel their
contract (Finding4). However,theactualtrans- monthly membership promptly aftertheystop
actioncosts are small. Users can purchasea attending (Finding4) becausetheyforget.Dis-
ten-visit pass by fillingout a simpleform,and tractioncan also explainFindings6 and7: non-
can thenenterthe club forten visitswiththe attendersfail to cancel in time,but theyget
same procedureas users with a monthlyor automatically disenrolled undertheannualcon-
annualcontract. A transaction-cost-based expla- tract.Rationalconsumers, however,shouldan-
nationrequiresa timecost of over$70 forthe ticipatetheirfuturelimitedmemoryand be
few minutesnecessaryto fillout the form.A waryof themonthly contract.Instead,over90
relatedexplanation involvespsychological trans- percentof customerswith flat-rate contracts
actioncosts,suchas distaste forpayment pervisit choosethemonthly contract (Table 2). In addi-
(DrazenPrelecand GeorgeLoewenstein, 1998). tion, even if we allow for overestimation of
Thesecostswouldalsoneedtobe high.Moreover, futurememory, thisinterpretation does notex-
theseexplanations do notrationalizetheover- plainFindings1 and 3.
estimation of futureattendance (Finding3) or 6. Time inconsistency with sophistication.
thedifferential renewalbehaviorforannualand Flat-ratecontracts areattractive to sophisticated
monthly contract(Findings5, 6, and 7). agentswith(3, 8) preferences (RobertH. Strotz,
3. Membershipbenefits.Findings1 and 4 1956; EdmundS. Phelpsand RobertA. Pollak,
could arise frompsychologicalbenefitsof the 1968; Laibson, 1997; Ted O'Donoghue and
monthly and annualmemberships. These con- Rabin,1999). Theseagentshave,in additionto
tractsmaymakethememberfeel"virtuous" or the usual discountfactor8, a discountfactor
providetheopportunity to impressothers.Ar- p < 1 betweenpresentandfuture payoffs. Their
guably,thesepsychological benefitshouldap- discountfunction is 1, 38,1382, ... . Giventhat
ply also to ten-visitpasses,sincein bothcases healthclubattendance involvesimmediate costs
consumerscompletean initialregistration pro- anddelayedbenefits, suchpresent-biased agents
cedureandreceivea card,whichcan be shown attendthehealthclub less oftenthantheywish
to friends.Evenifconsumers treatmonthly and at thetimeofenrollment. Theymaypurchasea
annualmemberships as special,however,it is flat-feemembership as a commitment device
hardto explainthedifferential renewalpatterns thatincreasesfuture attendance (Finding1).
formonthly andannualcontracts (Findings5 to These agentsalso delay one-timeactivities
7). If anything, the annual contractprovides withimmediatecosts,suchas contract cancel-
moremembership utility,giventhatit signalsa lation.The cancellationdelaysof theseagents
strongercommitment. This would imply a are too short,however,to accountforFindings
highersurvivalprobability fortheannualcon- 4 through 7, as we showwithan extensionof
tract,againstFinding5.25 thecalibrations in SectionIIIA. Usingthesame
4. Time-variation in preferences for exer- revealed-preference argument,we obtain a
cise. If people enrollwhenevertheyare most bound on cancellationdelay for sophisticates
enthusiastic aboutexercise,a rational(butslow) givenbyE[T] 5 max(4, - k]/s).26Under
updatingprocesswithmeanreversioncan ex- thecalibrated magnitudes27[k.2/3
k.2= $10,k = 0, and
plainthedelayin cancellation(Finding4) and
the decrease in attendanceamong surviving
26
The uniquenessof theequilibrium level of k* can be
25
Taste for membershiplikely implies that high- provedalongsimilarlinesofProposition 1 in JamesJ.Choi
attendanceusers switchfromthe monthlyto the annual et al. (2005).
contractto signalcommitment. This switchinsteadhap- 27 Laibson et al. (2004), M. Daniele Paserman
(2004),
pens foronly1.5 percentofthe6,875 spellsinitiatedwith andShuiandAusubel(2004) estimate thehyperbolic model
a monthlycontract. on fielddataand findvaluesof 3 between0.5 and 0.8.
3 = 0.8, nonattenders28 (s = $2.33) delay at delay fornaive agentsmatchesthe empirical

most 5.33 days,on average.Underthe same estimates.A modelofnaive(3, 8) agents,there-
assumptions, low attenders (s = $1) delay at fore,can explainall thefindings in thepaper.30
most12.5days.Theseboundsdo notdependon 8. Overestimation ofnetbenefits. Usersmay
theassumption 8 = 1. To showthis,we solve choose flat-rate contracts(Finding1) because
thedynamicprogramming problemas a func- theyoverestimate the futurebenefitsof atten-
tion of 0, assuminga discountfactor8 = dance or underestimate the expected future
0.9995 (corresponding to a yearlydiscountfac- costs.Projection bias (Loewenstein et al.,2003)
tor of 0.83). We considerthe low-attendance mayreinforce theeffectifhealthclubconsum-
case (s = $1) and assumek - N(15, 4).29The ers have highattendance expectations at sign-
resultingexpectedcancellation delayE[fT(Fig- up. This interpretation is consistentwith
ure3A) is 5 daysfor0 = 0.8 andis less than15 Findings3 and 4, butit does notexplainFind-
daysevenfora 0 as low as 0.5. Thiscalibrated ings 5, 6, and 8 on highersurvivalfor the
delayis substantially smallerthantheobserved monthly thanfortheannualcontract. In order
delay of over 60 days. Figure3B shows the foroverestimation toexplainall oftheempirical
corresponding probability of a delayT of over findings,consumersneed to have unrealistic
120 days(4 months).This probability is essen- expectations aboutboththecostsof attendance
tiallyzero for all 0 above 0.4, contrary to the andthecostsofcancellation. Thisis thecase if
empiricalfinding that 20 percent of users delay consumersoverestimate theirfuture efficiency,
for over 4 months.Time inconsistency with thatis, theirabilityto perform desirabletasks
sophistication, therefore, cannotgeneratethe such as healthclub attendanceand contract
delaysobservedin thedata. switching.
7. Time inconsistency withpartial naivete. 9. Persuasion.Given thatusers attendon
Agentswith(P, 8)-preferences maybe overcon- averagefewerthaneighttimespermonth, flat-
fidentabouttheirfuture self-control and expect ratecontracts areon averagemoreprofitable for
to have a discountparameter 13,with0 < the healthclubs thanpay-per-visit contracts.
1 (GeorgeA. Akerlof,1991; O'Donoghueand -< Healthclub employees,therefore, have incen-
Rabin, 2001). These (partially)naive agents tives to persuadeconsumersto sign flat-rate
may pay more than $10 per expectedvisit contracts. They can do thiseitherby notpro-
(Finding1) becausetheyoverestimate theirfu- viding(sufficient) information aboutthe pay-
tureattendance (Finding3). (Thisis in addition per-visitalternative or by urgingpeopleto take
to the commitment device reason.) We now up themonthly or annualcontract. We address
extendthecalibrations in SectionIIIA to show thefirstconcern, underprovision ofinformation,
thatnaive (3, 8) agentsmay also accumulate byconsidering thecontractual choicesofa sub-
substantialdelaysin thecancellationof an au- groupthatis surelywell-informed. In ourdata,
tomatically renewedcontract, the othermajor membersof a specificHMO can choose be-
finding in the paper.Figure 3A plotsthe ex- tween a 20-percentdiscounton the fiat-rate
pectedcancellation delayfora naiveagentwith contracts and a $6 payment pervisit.Members
low attendance (s = $1), 6 = 0.9995,andcosts claimingthe discountmusthave obtainedthe
k - N(15, 4). For 0 = 0.7, the cancellation information fromtheHMO itself,whichexplic-
delay of thenaive agentmatchesthedelay of itlylistsboth options.Nevertheless, the price
over 60 days observedin thedata. Moreover, perexpected attendance over months 1 to 6 for
thesamelevelof0 also matchestheprobability the 1,566 HMO membersenrollingwith a
ofdelayslastingover120days(Figure3B), 0.2. monthly contract equals $10.31 (s.e. 0.23), sig-
Differently from time-consistent and time- nificantly higherthanthe $6 price per visit.
inconsistent sophisticated agents,thepredicted Thus,even informed membersdisplaytheten-
dency to choose the more costly flat-rate
contract.
28
The savingss forsophisticated
agentsincludethe
benefitsofcommitment future
toa higher under
attendance
the flat-rate
contract(see DellaVignaand Malmendier,
30
The amountof delaypredicted by thenaivemodelis
2002). For or
decreasingin the varianceof thecost distribution.
29 Theresults
areessentially toanychoiceof
insensitive largerthan4, the calibrationsof the naive
substantially
E [10,30] ando2 E [1,49]. modeldo notmatchthedata.
,
E[days],
k-N(15,4).
delta=0.9995
80
70
60
50
40
E[dayst
30
20
E[days]naive
E[days]sop
10
0
0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1
beta
A. Simulatedexpected numberofdaysbeforea monthlymember switches
topayment pervisit
Assumptions:costk-N(15,4),dailysavingss=J,anddailydiscount delta= 0.9995.Theobserved
factor
averagedelayis 2.31 months
(70 days)(Finding
4)
delta=0.9995
k-N(15,4),
P[days>120],
04
0.35
0.3
0.25
0.2
P(days>120]
0.15
0.1
0.05
P[days>120 naive
P[days>120]sop
0
0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1
beta
B. Simulated thatcancellation
probability delayslastmorethan120days.Assumptions as inFigure3A.
The probability
forsophisticated
agentsis essentially
zero.Theobserved
shareofagentswith
delayover120daysis 20 percent
(Finding 4).
FIGURE3. CALIBRATION
OF EXPECTEDDELAY IN CANCELLATION
Alternatively, healthclub employeesmay likely to explain the differencein renewal

exertpressureon membersto choose a flat- betweenthemonthlyand annualcontract,al-
rate contract(Finding 1) (B. Douglas Bern- thoughhealthclub employeescan exertpres-
heim, 1994). Employeepersuasionmay also sure to renewon bothmonthlymembersand
explain the cancellationlag forthe monthly annualmembers.Persuasiondoes notexplain
contract(Finding4), even thoughmembers the surveyevidenceof overestimation of at-
can also cancel in writing.Persuasionis un- tendance(Finding3).
Out of thenineexplanations above,themost Longerlags n betweenthetwomeasuresdo not

successfulones,in ourview,involvebothover- affecttheestimate,suggestingthatthecorrela-
estimation of attendanceand overestimation of tionis notlikelyto be spurious.
cancellation.Overestimation of futureatten-
dance (Finding3) leads consumersto choose Finding8 (correlations):Userswhopay a high
contracts(Finding1). Overestimation
flat-rate price per attendanc in the monthly contract
of futurecancellationleads consumers to delay subsequentlydisplaya longergap betweenlast
cancellationin the monthlycontract(Finding attendanceand contracttermination.
4), butnotin theannualcontract whichrequires Theseresultsareconsistentwiththeidea that
no cost to cancel (Findings5 to 7). A model a uniqueexplanation-suchas overestimation
withthesefeaturesis thepartially naive(/3,6) of efficiencyor self-control-drivesboththe
modelofO'DonoghueandRabin(2001),which resultson the high price per attendancefor
we calibrateto thedata. A modelof overesti- flat-rate
memberships (SectionIIB) and there-
mationof futureefficiency (whichis not for- sultson renewalbehavior(SectionIIIB).
malizedin theliterature)wouldmakethesame
predictions,withoutreference In
to self-control.
addition,persuasionby healthclub employees V. Conclusion
is a plausible explanationfor some of the
findings. How do consumerschoose froma menuof
contracts?In thispaper we considercontract
A. Heterogeneity choicein healthclubs.Usinga newpaneldata-
set fromthreeU.S. healthclubs,we findthat
The leading explanationsuggeststhatone memberswho choose a contractwith a flat
mechanism-overestimation of future selfcon- monthlyfee of over $70 attendon average
trolor of future efficiency-is at theroot of all fewerthan4.5 timesper month.They pay a
findings.If this is thecase, and thereis hetero- priceperexpectedvisitof morethan$17, even
geneityin overestimation, we expecta correla- thoughtheycould pay $10 per visit using a
tionbetweenthefindings. In particular,monthly ten-visitpass. On average,theseusersforego
memberswho pay a highpriceperattendance savingsof over$600 duringtheirmembership.
shouldalso be morelikelyto accumulatea long We also findthatconsumerswho choose the
cancellation lag. Thisis notnecessarily thecase monthly, automaticallyrenewedcontract are 17
if thedifferent findings are driven by different percentmorelikelyto stayenrolledbeyondone
phenomena(suchas, forexample,riskaversion yearthanuserscommitting fora year.This is
forFindingI and limitedmemory forFindings surprisingbecause monthlymembers pay
4 to 7). higherfeesfortheoptionto canceleach month.
We testthisprediction forusersenrolledin We presentadditionalevidence,includingre-
themonthly contract. As a measureof cancel- sultson cancellationdelays and estimatesof
lationlags, we use thenumberof consecutive attendanceexpectations froma survey.These
fullmonthsbetweenthelastattendance andthe to reconcilewitha standard
resultsare difficult
expiration (as in Section IIIB). As a measure of model.We present a number ofexplanationsfor
priceper attendance, we take the ratio of the thefindings. The leadingexplanations involve
payments to thehealthclubovertheattendance overestimation offuture oroffuture
self-control
forthe periodbetweensign-upand n months efficiency.
beforethelastattendance, withn equal to 1, 2, The analysisof consumerbehavioris a first
3, and 4. We limitthetimeframein orderto step. Rational,profit-maximizinghealthclubs
avoid a spuriouscorrelation betweentheprice can observethefeaturesof consumerbehavior
per attendance and months of delaydue to low using datasetslike the one analyzed in this
attendance in thefinalmonths. Finally,we take paper.In DellaVignaand Malmendier(2004),
thelog of 1 plusthemeasuresin ordertoreduce we characterize theprofit-maximizingcontract
theskewnessof bothvariables.The correlation for goods withimmediatecosts and delayed
betweenthecancellationlag and thepriceper benefits,such as healthclub attendance.For
attendance is positiveand significant, withval- consumerswho are overconfident aboutfuture
ues between0.192 (n = 1) and 0.182 (n = 4). self-control-one oftheleadingexplanations in
thispaper-the profit-maximizing contractin- We use thepricestatedin the recordsas a

volves below-marginal cost pricingof atten- measureofthemonetary payments to theclubs.
danceand automatic renewalwitha transaction We could alternatively
use thefour-digitcode
cost of cancellation.The typicalcontractof anda conversiontable(basedon thepricesas of
healthclubsin theBostonareaindeedhas these August2000) to recoveran imputedprice.The
The evidenceon contractual
features. designis correlation
betweenthetwomeasuresofpriceis
consistentwith the findingson consumer 0.9668. None of theresultschangesif we use
behavior. theimputedpriceinsteadof theactualprice.
DATA APPENDIX MonthlyPanel.-We mergethe attendance

and thebillingpanelintoa uniquedataset,and
The data on consumerbehaviorcome from we thentransform thedataintoa balancedpanel
theattendancepaneland thebillingrecords.A with monthlyobservations.Each observation
identification
seven-digit numberallows us to consistsof a variabledefiningthemembership
linkmultiplespellsof thesameindividual. (not enrolled/enrolledin a monthlycontract/
enrolledin an annualcontract/in a freeze),the
Attendance Panel.-Each timea userwitha numberof attendances in the month,and the
flat-ratecontractexercises,a staffmember pricepaidforthemonth. Foran annualcontract,
swipestheelectronic cardoftheuser,andthere- themonthly priceis V/12theoriginalprice.We
forecreatesan attendance record.An observa- proratethe fees in thefirstmonthof monthly
tion of the attendancepanel consistsof the and annualcontracts thatstartin themiddleof
individualidentificationnumber, thedateofthe a month.We also proratethe feesin thefinal
visit,basic demographic information (birthday,monthof an annualcontract. Monthlycontracts
gender),a code for short-term memberships, alwaysterminate on thelastday of themonth,
and theenrollment and theexpiration date(for so no proratingis neededforthelastmonth.
memberswhoterminated themembership). All
information otherthanthedateof visitis con- Enrollment Spells.-We definean enrollment
stant across the observationsfor a given spell as thetimeperiodof continuous monthly
individual. and/orannualmembership, includingpossible
freezesofthemembership. If no morethanone
BillingRecords.-The healthclubs keep an full calendar
month of nonenrollment separates
officialrecordof thecustomerpayments.The two contracts of an individual, we stillinclude
billingdataprovidedetailedandaccurateinfor- themin one spell.For example,thisis thecase
mationaboutthecategoryof users-retail(the if an annualcontractexpiringon 1/15/98is
default),student,family,corporate-aswell as renewedon 3/17/98. The missingmonthly pay-
thetypeof transaction. Each lineof thebilling mentmaybe due to an (unrecorded) one-month
panel consistsof theindividualID, thedateof promotional offer,a delayin payment, or miss-
the contractual transaction,thefour-digit code ing datafora monthly payment.
thatidentifiesthetransaction,andthepricepaid We consideran enrollment spellcensoredif
(if any). For example,line "1234567 1/1/98 it is eitherongoingat theendof thepanelor if
R564 55" indicatesthatuser 1234567paid an it is followedby a short-term contractor a
out-of-pocket monthly feeof $55 on January 1, promotional membership. Otherwise, the spell
1998.Thismonthly feeappliesto employeesof is completed.
Short-term contracts areone-month,
the companylinked to code R564. For the two-month, three-month, andfour-month mem-
monthlycontract, typicaltransactions are the bershipswithautomaticexpiration. These are
paymentof theinitiation fee,themonthly fee, uncommoncontracts designedforsummerus-
and such items as an overnightlockeror a ers. We identifypromotional contractsas a se-
personaltrainer.Othercodes involvemonthly quence of months with no contractand
freezes of memberships, bounced payments, attendancein at least halfof the months.We
and termination of a membership for delin- assumethatin theseperiodshealthclub mem-
quencyin the payments.For the annualcon- bers are using a freetemporary membership,
tract,typicaltransactionsarethepayment ofthe whichtheclubsgrantin variouspromotional or
initiationfee and of theannualfee. charitableinitiatives.
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American Economic Association

Paying Not to Go to the Gym

How do consumers choosefroma menuofcontracts?We analyzea noveldataset

"Saturday 31 December.New Year's Res- tions of monthlyairtimeminutesand prices.

TABLE 1-EMPIRICAL FEATURESAND POSSIBLEEXPLANATIONS

ior. The datasetcontainsinformation bothon of visits.Eightypercentof themonthly mem-

in pursuing costlyactivities.Thisleadsto over- theassumption ofrationalexpectations can lead

thesehealthclubs,describedbelow.The panel sidypaid bytheircompany,and no initiation

els,5andaccesstotheequipment.Also,boththe club 1 has 22 percentmoremembersthanclub

TABLE 2-DESCRIPTIVE STATISTICS

Sample:All Sample:No subsidy

customers therightto exercisefora feep' and userswho selecttheannualcontract, therefore,

Flat Rate versusPay per Usage.-We con- > EM[v].

TABLE 3-PRICE PER AVERAGEATTENDANCEAT ENROLLMENT

Sample:No subsidy,all clubs

Notes: Standarderrorsin parentheses. Standarderrorsfor"averagepriceperaverageatten-

withstandards errorsin parentheses.The sam- exceeds$80 in all months,exceptin thejoining

Sample:No subsidy,all clubs

Notes:The numberof observations is denotedbyN. An enrollment spellstartswhenever an

averageattendance in montht (column2). This totalpaymentin thefirstsix monthsof mem-

9 We excludethreeannualcontracts thatare terminated

(column2) is 4.36. The resultingpriceperav- tentionto theunsubsidizedsampleand pooled

Average attendance in club 1 Price per averageattendancein club 1

Averageattendancein club 2 Price per averageattendancein club 2

Averageattendancein club 3 Price per average attendancein club 3

FIGURE 1. AVERAGEATTENDANCEAND PRICE PER AVERAGEATTENDANCE(KERNEL REGRESSIONS)

Notes: Pointestimatesand 95-percentconfidence intervalsplotted.The sampleis all individualsinitiallyenrolledwitha

As supporting evidence,we can testwhether TABLE5-AVERAGEATTENDANCEINMONTHLY

5 We exclude the firstmonthbecause attendanceis

20 cells out of 24. Even aftercontrolling

of thecontractual period,each consumer can ei- In orderto calibratetheupperboundforthe

themonthlymembership:SA,t> SM,,for t = 12, periodofnonattendance.We restrict

comparison can be madeonlyacrossyears,sincetheselec- quittheclubbuthave reenrolled

TABLE 6---PROBIT OF RENEWAL DECISION

Sample all clubs

Controls+ Controls+ Controls+ Controls+ Controls+

Notes:Standarderrorsin parentheses. The numberof observations is denotedby N. Entriesin thetablerepresent themarginalcoefficients

forcorporate membership, a dummyforstudent geneityreducesthedownwardbias on theco-

afterthejoiningdateas an alternative measureof montht is givenby usersin the"no subsidy"

22 The results ifwe restrict

Sample:No subsidy,all clubs Sample:All clubs

Notes: Standarderrorsin parentheses.Standarderrorsfor"averagepriceperaverageattendance" measurecomputedusing

themonthly contract(Finding7), a pattern

explaintheadditionalfindings.We thendiscuss payments.24 Overthesmallamounts ofmoney

healthclubmembers shouldbe locallyriskneu- monthly members(Finding7). Mean reversion,

3 = 0.8, nonattenders28 (s = $2.33) delay at delay fornaive agentsmatchesthe empirical

Alternatively, healthclub employeesmay likely to explain the differencein renewal

Out of thenineexplanations above,themost Longerlags n betweenthetwomeasuresdo not

thispaper-the profit-maximizing contractin- We use thepricestatedin the recordsas a

DATA APPENDIX MonthlyPanel.-We mergethe attendance

REFERENCES Hendel,IgalandNevo,Aviv."Intertemporal Sub-

UtilityTheory: A CalibrationTheorem." Strotz,RobertH. "Myopiaand Inconsistencyin

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