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

  • Fabian Duarte
  • Justine S. Hastings

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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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
Date of revision:
Handle: RePEc:nbr:nberwo:18582
Note: AG IO PE
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-77, September.
  2. Giovanni Mastrobuoni, 2009. "The Role of Information for Retirement Behavior: Evidence Based on the Stepwise Introduction of the Social Security Statement," Working Papers, Center for Retirement Research at Boston College wp2009-23, Center for Retirement Research, revised Oct 2009.
  3. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
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