Commitment and partial naïveté: Early withdrawal penalties on retirement accounts

Torben M. Andersen, Joydeep Bhattacharya and Pan Liu

Journal of Mathematical Economics, 2023, vol. 106, issue C

Abstract: We analyze a portfolio allocation problem in a standard model of conflict within temporal selves who suffer from partial naïveté – the current self holds a deterministic but possibly wrong perception (underestimation) about the present bias of her future selves. The current self can invest in a liquid and a longer-maturity, illiquid asset; the latter offers partial commitment since the future self may prematurely liquidate it at a penalty rate. If the cost is prohibitive, no liquidation happens, and the first-best plan laid out by the current self is followed. When such costs are modest, raising them has countervailing income and substitution effects. Consequently, in a range, a strengthening of the commitment device of illiquidity is not necessarily welfare increasing for the current self.

Keywords: Partial naïveté; Present-bias; Retirement accounts; Commitment (search for similar items in EconPapers)
Date: 2023
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Working Paper: On the Commitment and partial naïveté: Early withdrawal penalties on retirement accounts (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:106:y:2023:i:c:s030440682300037x

DOI: 10.1016/j.jmateco.2023.102844

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