https://macropaperwarehouse.com/authors/hubert-janos-kiss/Hubert János KissHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/redemption-fees-and-gates-in-the-lab/https://macropaperwarehouse.com/papers/redemption-fees-and-gates-in-the-lab/<p>This paper uses laboratory experiments to evaluate the effectiveness of two liquidity management tools — redemption fees and redemption gates — in reducing runs on money market funds (MMFs), explicitly accounting for preemptive run behavior where investors withdraw before a fee or gate is triggered to avoid being harmed by its imposition. The experimental design is based on a Diamond–Dybvig framework modified following Engineer (1989), in which four investors must decide whether to withdraw before learning their own liquidity type (patient or impatient), generating a setting where preemptive runs are theoretically possible even without fear of fund default. Three treatments are compared: a laissez-faire baseline, a gates treatment (withdrawals suspended after cash reserves are exhausted), and a fees treatment (a redemption fee charged on withdrawals once cash reserves are exhausted). Across 15-period session halves, redemption fees produce significantly lower withdrawal rates than both the baseline and gates treatments, with the gap emerging primarily after the first ten periods as participants adapt to the tool; gates, contrary to the theoretical prediction that they reduce the risk factor of the no-run equilibrium, do not lower withdrawal rates relative to the baseline — and in the full-session analysis, gates actually generate significantly higher withdrawal rates than the baseline, consistent with preemptive runs accelerating when investors fear losing access to their funds. The overall finding is that neither tool eliminates fund fragility, but fees offer a modest and delayed stabilizing effect while gates are counterproductive, lending empirical support to the SEC&rsquo;s 2023 regulatory shift away from gates and toward fees in MMF regulation.</p>