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

Fabián Duarte () and Justine Hastings

No 18582, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D14 D18 G11 G23 L20 L21 L51 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-reg
Note: AG IO PE
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