Measuring Valuation of Liquidity with Penalized Withdrawals

We propose using penalized withdrawals from retirement savings accounts, identified from U.S. tax records, as a revealed-preference tool to analyze households’ valuation of liquidity. A simple dynamic model formalizes the notion that the prevalence of withdrawals can be used to characterize American households’ valuation of liquidity over time and space. Over time, we find that declines in household income lead to sudden, large, and persistent jumps in the probability of penalized withdrawals, providing evidence that shocks are imperfectly insured and that households have high valuation of liquidity. Across space, we show that both local economic conditions and persistent household characteristics play an important role, with the average valuation of liquid- ity being higher in financially underdeveloped areas as well as in black communities, consistent with them being marginalized from the credit market. Applying our tool to the Great Recession, we further find that more affected areas saw larger increases in penalized withdrawals, likely driven by tightening of local credit conditions. Overall, our analysis offers a new tool to study the valuation of liquidity, and our results point to sizable welfare gains from social insurance policies targeted at both households and locations over time.