Commitment and partial naïveté: Early withdrawal penalties on retirement accounts

Torben M. Andersen; Joydeep Bhattacharya; Pan Liu

doi:10.1016/j.jmateco.2023.102844

Commitment and partial naïveté: Early withdrawal penalties on retirement accounts

Torben M. Andersen, Joydeep Bhattacharya, Pan Liu^*

^*Corresponding author for this work

Department of Economics and Business Economics

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

1 Citation (Scopus)

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.

Original language	English
Article number	102844
Journal	Journal of Mathematical Economics
Volume	106
ISSN	0304-4068
DOIs	https://doi.org/10.1016/j.jmateco.2023.102844
Publication status	Published - May 2023

Keywords

Commitment
Partial naïveté
Present-bias
Retirement accounts

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Andersen_Bhattacharya_Liu_JME_2023_AMAccepted manuscript, 1.11 MBLicence: CC BY-NC-ND

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title = "Commitment and partial na{\"i}vet{\'e}: Early withdrawal penalties on retirement accounts",

abstract = "We analyze a portfolio allocation problem in a standard model of conflict within temporal selves who suffer from partial na{\"i}vet{\'e} – 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 = "Commitment, Partial na{\"i}vet{\'e}, Present-bias, Retirement accounts",

author = "Andersen, {Torben M.} and Joydeep Bhattacharya and Pan Liu",

note = "Publisher Copyright: {\textcopyright} 2023 Elsevier B.V.",

year = "2023",

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doi = "10.1016/j.jmateco.2023.102844",

language = "English",

volume = "106",

journal = "Journal of Mathematical Economics",

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T1 - Commitment and partial naïveté

T2 - Early withdrawal penalties on retirement accounts

AU - Andersen, Torben M.

AU - Bhattacharya, Joydeep

AU - Liu, Pan

PY - 2023/5

Y1 - 2023/5

N2 - 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.

AB - 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.

KW - Commitment

KW - Partial naïveté

KW - Present-bias

KW - Retirement accounts

U2 - 10.1016/j.jmateco.2023.102844

DO - 10.1016/j.jmateco.2023.102844

M3 - Journal article

AN - SCOPUS:85152963843

SN - 0304-4068

VL - 106

JO - Journal of Mathematical Economics

JF - Journal of Mathematical Economics

M1 - 102844

ER -

Commitment and partial naïveté: Early withdrawal penalties on retirement accounts

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Keywords

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