Working Paper: CEPR ID: DP17499
Authors: David Coyne; Itzik Fadlon; Tommaso Porzio
Abstract: We propose using penalized withdrawals from retirement savings accounts, identifiedfrom U.S. tax records, as a revealed-preference tool to analyze households’ valuation ofliquidity. A simple dynamic model formalizes the notion that the prevalence of withdrawals can be used to characterize American households’ valuation of liquidity overtime and space. Over time, we find that declines in household income lead to sudden,large, and persistent jumps in the probability of penalized withdrawals, providing evidence that shocks are imperfectly insured and that households have high valuation ofliquidity. Across space, we show that both local economic conditions and persistenthousehold characteristics play an important role, with the average valuation of liquid-ity being higher in financially underdeveloped areas as well as in black communities,consistent with them being marginalized from the credit market. Applying our tool tothe Great Recession, we further find that more affected areas saw larger increases inpenalized withdrawals, likely driven by tightening of local credit conditions. Overall,our analysis offers a new tool to study the valuation of liquidity, and our results pointto sizable welfare gains from social insurance policies targeted at both households andlocations over time.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| declines in household income (G59) | increases in the probability of penalized withdrawals (J26) |
| local economic conditions (R11) | average valuation of liquidity (G33) |
| increases in unemployment (J64) | increases in penalized withdrawals (H55) |