Optimal Illiquidity

64 Pages Posted: 7 Jul 2020 Last revised: 10 Jan 2022

See all articles by John Beshears

John Beshears

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

James J. Choi

Yale School of Management; National Bureau of Economic Research (NBER)

Christopher Clayton

Yale School of Management

Christopher Harris

University of Cambridge - Department of Applied Economics

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Brigitte C. Madrian

Brigham Young University Marriott School of Business; National Bureau of Economic Research (NBER)

Date Written: July 2020

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

Beshears, John and Choi, James J. and Clayton, Christopher and Harris, Christopher J. and Laibson, David I. and Madrian, Brigitte C., Optimal Illiquidity (July 2020). NBER Working Paper No. w27459, Available at SSRN: https://ssrn.com/abstract=3644059

John Beshears (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James J. Choi

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher Clayton

Yale School of Management ( email )

Cambridge, MA
United States

Christopher J. Harris

University of Cambridge - Department of Applied Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DE
United Kingdom
+44 1223 330152 (Phone)
+44 1223 330152 (Fax)

David I. Laibson

Harvard University - Department of Economics ( email )

Littauer Center
Room M-14
Cambridge, MA 02138
United States
617-496-3402 (Phone)
617-495-8570 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brigitte C. Madrian

Brigham Young University Marriott School of Business ( email )

Provo, UT 84602
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
324
PlumX Metrics