Optimal Illiquidity

We study the socially optimal level of illiquidity in an economy populated by house- holds with taste shocks and present bias with naive beliefs. The government chooses mandatory contributions to accounts, each with a different pre-retirement withdrawal penalty. Collected penalties are rebated lump sum. When households have homoge- neous present bias, β, the social optimum is well approximated by a single account with an early-withdrawal penalty of 1 − β. When households have heterogeneous present bias, the social optimum is well approximated by a two-account system: (i) an account that is completely liquid and (ii) an account that is completely illiquid until retirement.