This paper examines why tax incentives fail to stimulate participation in China's third-pillar commercial pension insurance, emphasizing the role of rational inattention. Using household survey data from China Family Panel Studies (CFPS) spanning 2014-2022 and a difference-in-differences-in-differences (DDD) design, we find that pilot policy generated a statistically insignificant average effect on participation, with rational inattention - proxied by financial literacy - explaining much of its ineffectiveness. We develop a dynamic consumption-portfolio model featuring costly information acquisition, and then resolve limitations of standard models through a dynamic framework with distinct savings channels and policy-focused rational inattention. The models show that rational inattention distorts perceptions of tax benefits and wage growth, raising participation costs, while multiple savings channels dilute incentives. Only households with higher financial literacy substantially respond to the policy. Our results reveal how cognitive frictions undermine pension reform and offer implications for designing behaviorally-informed retirement schemes.

In this paper, we develop an equilibrium model for market liquidity and its impact on asset prices when constant participation in the market is costly. We show that, even when agents' trading needs are perfectly matched, costly participation prevents them from synchronizing their trades, which gives rise to the need for liquidity. Moreover, the endogenous liquidity need, when it occurs, can lead to market crashes in absence of any aggregate shock. We also show that the lack of coordination among agents in the demand and the supply of liquidity generates negative externalities, and the loss in social welfare can out-weigh the savings on participation costs.