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Fettered Consumers and Sophisticated Firms: Evidence from Mexico's Privatized Social Security Market

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  • Fabian Duarte
  • Justine S. Hastings

Abstract

This paper brings new evidence from the privatized social security system in Mexico, offering insight into investment behavior and the efficacy of government “nudges” in the context of profit maximizing firms. We use administrative data from the social security system surrounding the government adoption of a new official fee index aimed at simplifying fees and increasing price sensitivity of investors. The fee index combined load and management fees in a particular way, implying that choosing a lower index firm could lead many workers to choose a higher-cost fund for them. We find that before the index, investors of all backgrounds paid little attention to fees when choosing fund managers. Post-policy intervention, investors heavily weighted the fee index regardless of whether doing so caused them to choose a higher-cost fund. In contrast to investors, we find that firms responded optimally to the changes in demand induced by government policy, restructuring rather than lowering their fees to minimize the index. The strategic response erased gains to consumers from increased price sensitivity and redistributed management fees from high-income to low-income segments of the market. We conclude that regulations and policies aimed at aiding consumer decision-making also need to incorporate firm incentives to be effective.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18582.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18582

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  1. Mastrobuoni, Giovanni, 2011. "The role of information for retirement behavior: Evidence based on the stepwise introduction of the Social Security Statement," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7-8), pages 913-925, August.
  2. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-11, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Justine Hastings & Olivia S. Mitchell, 2010. "How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors," Working Papers, University of Michigan, Michigan Retirement Research Center wp233, University of Michigan, Michigan Retirement Research Center.
  2. Hunt Allcott & Richard Sweeney, 2014. "Information Disclosure through Agents: Evidence from a Field Experiment," NBER Working Papers 20048, National Bureau of Economic Research, Inc.
  3. Todd Kumler & Eric Verhoogen & Judith A. Frías, 2013. "Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico," NBER Working Papers 19385, National Bureau of Economic Research, Inc.
  4. Alisdair McKay, 2013. "Search for Financial Returns and Social Security Privatization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 253-270, April.
  5. Justine S. Hastings & Ali Hortaçsu & Chad Syverson, 2013. "Advertising and Competition in Privatized Social Security: The Case of Mexico," NBER Working Papers 18881, National Bureau of Economic Research, Inc.
  6. Justine S. Hastings & Brigitte C. Madrian & William L. Skimmyhorn, 2012. "Financial Literacy, Financial Education and Economic Outcomes," NBER Working Papers 18412, National Bureau of Economic Research, Inc.
  7. Santosh Anagol & Hugh Hoikwang Kim, 2012. "The Impact of Shrouded Fees: Evidence from a Natural Experiment in the Indian Mutual Funds Market," American Economic Review, American Economic Association, American Economic Association, vol. 102(1), pages 576-93, February.

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