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

Parada-Contzen Marcela ()
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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

The B.E. Journal of Economic Analysis & Policy, 2022, vol. 22, issue 4, 655-714

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.

Keywords: retirement income policy; default investment; elicited risk aversion (search for similar items in EconPapers)
JEL-codes: C30 D91 E21 G11 J26 J32 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/bejeap-2021-0388

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