Christopher Clayton

Yale School of Management
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P.O. Box 208200
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Institutional Affiliation: Yale University

NBER Working Papers and Publications

July 2020Optimal Illiquidity
with John Beshears, James J. Choi, Christopher Harris, David Laibson, Brigitte C. Madrian: w27459
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%...

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