Optimal Illiquidity

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

No 27459, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D02 D14 G51 H21 H31 H55 (search for similar items in EconPapers)
Date: 2020-07
Note: AG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Optimal illiquidity (2025)
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