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Commitment and partial naïveté: Early withdrawal penalties on retirement accounts

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  • Andersen, Torben M.
  • Bhattacharya, Joydeep
  • Liu, Pan

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.

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  • Andersen, Torben M. & Bhattacharya, Joydeep & Liu, Pan, 2023. "Commitment and partial naïveté: Early withdrawal penalties on retirement accounts," Journal of Mathematical Economics, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:mateco:v:106:y:2023:i:c:s030440682300037x
    DOI: 10.1016/j.jmateco.2023.102844
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