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Default Behavior and Risk Aversion in Defined Contribution Retirement Systems: Evidence from Chile

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  • Parada-Contzen Marcela

    (Millennium Nucleus (Intergenerational Mobility: From Modeling to Policy) and Departamento de Ingeniería Industrial, Facultad de Ingenería, Universidad de Concepción, Edmundo Larenas 219, Concepción, Chile)

Abstract

This paper studies the design of investment policies in defined contribution retirement systems. I estimate a dynamic system of correlated equations of lifecycle behavior that fully models the individual’s decision-making process to account for estimation biases. In the model, individuals make decisions that impact their retirement wealth within the Chilean retirement system. Behaviors are allowed to depend on risk preferences while modeling other sources of nonlinear unobserved heterogeneity. The estimated decision-making process allows us to simulate the effects of policy experiments (ex ante), such as defaulting individuals into riskier investment strategies or increasing contribution rates. The results indicate that individuals react by opting into safer plans despite their observed inertia and that increases in mandatory contributions generate little crowding out of other behaviors. Not modeling risk aversion and its endogeneity with behavior leads to substantial simulation biases.

Suggested Citation

  • Parada-Contzen Marcela, 2022. "Default Behavior and Risk Aversion in Defined Contribution Retirement Systems: Evidence from Chile," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 22(4), pages 655-714, October.
    • Handle: RePEc:bpj:bejeap:v:22:y:2022:i:4:p:655-714:n:4
    DOI: 10.1515/bejeap-2021-0388
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    More about this item

    Keywords

    retirement income policy; default investment; elicited risk aversion;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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