Redemption fees and gates in the lab

Liquidity management tools - such as redemption fees (which impose a cost on withdrawals) or gates (which suspend withdrawals when they become excessive) - are commonly used in the fund industry with the aim of mitigating run behavior and reducing fund fragility. Recent attention has been paid to the fact that these tools may give rise to preemptive runs, where investors withdraw preemptively to avoid the risk of being affected by temporary redemption restrictions. Since real-market testing is not feasible, we use laboratory experiments to evaluate the effectiveness of redemption fees and gates in reducing money market fund runs, in a setting where investors may withdraw preemptively. We find that fees significantly reduce the propensity to run compared to the baseline without liquidity management tools, whereas gates do not lower the propensity to run. However, the effect of fees on withdrawal behavior is relatively small and takes some time to materialize. Overall, our experimental results indicate that preemptive runs are a real concern and that liquidity management tools are unlikely to eliminate fund fragility, which is consistent with the experience of the 2020 money market fund turmoil.