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Sales Force and Competition in Financial Product Markets: The Case of Mexico's Social Security Privatization

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  • Justine Hastings
  • Ali Hortaçsu
  • Chad Syverson

Abstract

This paper examines how sales force impacts competition and equilibrium prices in the context of a privatized pension market. We use detailed administrative data on fund manager choices and worker characteristics at the inception of Mexico's privatized social security system, where fund managers had to set prices (management fees) at the national level, but could select sales force levels by local geographic areas. We develop and estimate a model of fund manager choice where sales force can increase or decrease customer price sensitivity. We find exposure to sales force lowered price sensitivity, leading to inelastic demand and high equilibrium fees. We simulate oft proposed policy solutions: a supply‐side policy with a competitive government player and a demand‐side policy that increases price elasticity. We find that demand‐side policies are necessary to foster competition in social safety net markets with large segments of inelastic consumers.

Suggested Citation

  • Justine Hastings & Ali Hortaçsu & Chad Syverson, 2017. "Sales Force and Competition in Financial Product Markets: The Case of Mexico's Social Security Privatization," Econometrica, Econometric Society, vol. 85(6), pages 1723-1761, November.
    • Handle: RePEc:wly:emetrp:v:85:y:2017:i:6:p:1723-1761
    DOI: 10.3982/ECTA12302
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    References listed on IDEAS

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    1. Gary S. Becker & Kevin M. Murphy, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 941-964.
    2. Justine Hastings & Olivia S. Mitchell, 2010. "How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors," Working Papers wp233, University of Michigan, Michigan Retirement Research Center.
    3. Jason Abaluck & Jonathan Gruber, 2011. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," American Economic Review, American Economic Association, vol. 101(4), pages 1180-1210, June.
    4. Ali Hortaçsu & Chad Syverson, 2004. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 403-456.
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    13. Justine S. Hastings & Brigitte C. Madrian & William L. Skimmyhorn, 2013. "Financial Literacy, Financial Education, and Economic Outcomes," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 347-373, May.
    14. Michael D. Grubb & Matthew Osborne, 2015. "Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock," American Economic Review, American Economic Association, vol. 105(1), pages 234-271, January.
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    Cited by:

    1. Margaret Miller & Julia Reichelstein & Christian Salas & Bilal Zia, 2015. "Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature," World Bank Research Observer, World Bank Group, vol. 30(2), pages 220-246.
    2. Chioveanu, Ioana, 2019. "Prominence, complexity, and pricing," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 551-582.
    3. Ali Hortaçsu & Seyed Ali Madanizadeh & Steven L. Puller, 2017. "Power to Choose? An Analysis of Consumer Inertia in the Residential Electricity Market," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 192-226, November.
    4. Lint Barrage & Eric Chyn & Justine Hastings, 2014. "Advertising and Environmental Stewardship: Evidence from the BP Oil Spill," NBER Working Papers 19838, National Bureau of Economic Research, Inc.
    5. Matteo Benetton, 2017. "Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket," 2017 Meeting Papers 1001, Society for Economic Dynamics.
    6. Giuseppe Marotta, 2018. "Why choosing dominated personal pension plans: sales force and financial literacy effects," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0072, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    7. Nathaniel Hilger, 2017. "All Together Now: Leveraging Firms to Increase Worker Productivity Growth," NBER Working Papers 23905, National Bureau of Economic Research, Inc.
    8. Serafin Grundl & You Suk Kim, 2019. "Consumer mistakes and advertising: The case of mortgage refinancing," Quantitative Marketing and Economics (QME), Springer, vol. 17(2), pages 161-213, June.
    9. Justine Hastings & Christopher A. Neilson & Seth D. Zimmerman, 2015. "The Effects of Earnings Disclosure on College Enrollment Decisions," NBER Working Papers 21300, National Bureau of Economic Research, Inc.
    10. Giuseppe Marotta, 2019. "Behind the success of dominated personal pension plans: sales force and financial literacy factors," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0077, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    11. Valentino Dardanoni & Paola Manzini & Marco Mariotti & Christopher J. Tyson, 2017. "Inferring Cognitive Heterogeneity from Aggregate Choices," Discussion Paper Series, School of Economics and Finance 201701, School of Economics and Finance, University of St Andrews, revised 25 May 2017.
    12. repec:aea:jecper:v:32:y:2018:i:1:p:155-78 is not listed on IDEAS
    13. Serafin J. Grundl & You Suk Kim, 2017. "Consumer Mistakes and Advertising : The Case of Mortgage Refinancing," Finance and Economics Discussion Series 2017-067, Board of Governors of the Federal Reserve System (US).

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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