Switching Costs in Pension Plan Choice
Abstract: How well do market mechanisms for retirement savings function when there are switching costs? This work answers this question by estimating a dynamic demand model with switching costs for pension fund administrator choice in Chile's privatized pension market. This market exhibits significant price dispersion and very low switching rates, and switching costs are often mentioned as a likely driver of this outcome. If this is the case, then regulatory intervention to lower switching costs may increase welfare. This is not only important for the functioning of the Chilean pension market, but also more generally for other settings where governments mandate consumer participation and set the default as continuing in the same firm as last period. A key challenge in dynamic demand models is the fact that consumers form expectations about the future evolution of product characteristics and base their choices on them. Using a new methodology, based on a combination of revealed preference inequalities and latent variable integration, this work takes these expectations into account without having to model them explicitly, while using exclusion restrictions to separate switching costs from unobserved preference heterogeneity. I find evidence for a lower bound on switching costs of $1,400 dollars, a number significantly higher than that found in previous work. Furthermore, I find evidence that consumers over-value returns differences across pension fund administrators relative to price differences. Observed prices are, on average, roughly twice as high as in a no switching cost counterfactual, suggesting that policy interventions to lower switching costs would be beneficial.
Estimating the Effect of Potential Entry on Market Outcomes Using a Licensure Threshold (with Sarah Moshary)
Abstract: We study the effects of potential entry on market outcomes in the context of Washington state's 2012 switch from a state-run monopoly to private liquor sale. Concern about alcohol-related crime prompted regulators to institute a 10,000 square foot licensure requirement to curtail entry. This store size threshold generates plausibly exogenous variation in the number of eligible entrants in local liquor markets across the state. We find that widening the pool of potential entrants has a small effect on pricing, but a significant effect on product offerings. In particular, markets with more potential entrants see a compositional shift in product offerings towards cheaper goods. Further, we find that the size requirement changes the composition of entrant size, rather than the aggregate number of entrants.
Research in Progress
Competition, Asymmetric Information and the Annuity Puzzle: Evidence from a Government-Run Exchange in Chile (joint with Manisha Padi)
Abstract: Government-run exchanges, public platforms where private firms and consumers trade, are gaining popularity to improve the efficiency of insurance markets. We focus on the platform for purchasing annuities for retirees in the Chilean privatized pension system. Voluntary annuitization of retirement wealth is very common, with more than 60% of retirees purchasing a private annuity through the exchange. In contrast, less than 5% of US retirees purchase annuities, despite theoretical predictions that annuitization should be higher. Using a novel individual-level dataset, we provide new evidence that consumers select based on private information into differentiated intermediaries, firms, and contract types, in addition to adverse selection into annuities as a whole. We set up a structural life-cycle model of consumer demand for annuities to study the welfare implications of firm differentiation, competition and endogenous selection of unobservable types into retirement products. This model allows us to simulate counterfactuals where the alternative to annuitization is analogous to the US, and propose three reasons that may be driving Chilean retirees to annuitize at a higher rate than US retirees: 1) the design of the government-mandated "outside option" to annuitization, 2) lower markups, and 3) firms' ability to price on many consumer characteristics, leading to lower levels of adverse selection.