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Optimal Illiquidity

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Listed:
  • John Beshears
  • James J. Choi
  • Christopher Clayton
  • Christopher Harris
  • David Laibson
  • Brigitte C. Madrian

Abstract

We calculate the socially optimal level of illiquidity in an economy populated by households with taste shocks and present bias (Amador, Werning, and Angeletos 2006). The government chooses mandatory contributions to respective spending/savings accounts, each with a different pre-retirement withdrawal penalty. Penalties collected by the government are redistributed through the tax system. When naive households have heterogeneous present bias, the social optimum is well approximated by a three-account system: (i) a completely liquid account, (ii) a completely illiquid account, and (iii) an account with a ~10% early withdrawal penalty. In some ways this resembles the U.S. system, which includes completely liquid accounts, completely illiquid Social Security and 401(k)/IRA accounts with a 10% early withdrawal penalty. The social optimum is also well approximated by an even simpler two-account system—(i) a completely liquid account and (ii) a completely illiquid account—which is the most common retirement system in the world today.

Suggested Citation

  • John Beshears & James J. Choi & Christopher Clayton & Christopher Harris & David Laibson & Brigitte C. Madrian, 2020. "Optimal Illiquidity," NBER Working Papers 27459, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27459
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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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