Optimal illiquidity

John Beshears, James Choi, Christopher Clayton, Christopher Harris, David Laibson and Brigitte Madrian

Journal of Financial Economics, 2025, vol. 165, issue C

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

Keywords: Self-control; Present bias; Illiquidity; Mandatory savings; Social Security (search for similar items in EconPapers)
Date: 2025
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Working Paper: Optimal Illiquidity (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:165:y:2025:i:c:s0304405x25000042

DOI: 10.1016/j.jfineco.2025.103996

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