Optimal Illiquidity

By: John Beshears, James J. Choi, Christopher Clayton, Christopher Harris, David Laibson and Brigitte C. Madrian

Format:Print
| Language:English

Abstract

We calculate the socially optimal level of illiquidity in an economy populated by households with taste shocks and naive present bias. The government chooses mandatory contributions to accounts, each witha different pre-retirement withdrawal penalty. Collected penalties are redistributed through the tax system. When households have homogeneous present bias (beta), the social optimum is well approximated by a single account with an early-withdrawal penalty of (1 - beta). When households have heterogeneous present bias, the social optimum is well approximated by a two-account system: (i) an account that is always completely liquid and (ii) an account that is completely illiquid until retirement.

Keywords

Illiquidity; Commitment; Flexibility; Savings; Social Security; Retirement; Government Legislation; Taxation; Saving

Citation

Beshears, John, James J. Choi, Christopher Clayton, Christopher Harris, David Laibson, and Brigitte C. Madrian. "Optimal Illiquidity." Working Paper, July 2022.