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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.

Suggested Citation

  • Fabian Duarte & Justine S. Hastings, 2012. "Fettered Consumers and Sophisticated Firms: Evidence from Mexico's Privatized Social Security Market," NBER Working Papers 18582, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18582
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    References listed on IDEAS

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    1. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
    2. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    3. 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, vol. 95(7), pages 913-925.
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    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
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • 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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