Consumer Behavior in Mexico’s
Privatized Social Security System
Justine Hastings, Yale University and NBER
Motivation
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Movement towards increased choice, privatization in traditionally publicly provided
markets
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Goals of harnessing market power to improve efficiency (education, healthcare, social
security)
Efficiency gains depend on consumer behavior
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Full-information
Frictionless market
Forward-looking, rational decision making
Look to private markets, we find that many of these assumptions fail to hold,
competitive markets don’t always provide efficient solution
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Competition on advertising may replace price competition if consumers focus on brand-name
more than price (Dorfman and Steiner (1954), Dixit and Norman (1978), Sirri and Tufano
(1998), Barber, Odean and Zheng (2005), Cronqvist (2006) and Bagwell (2007)).
Consumers may focus more on brand name or other salient features if prices or their
relevance are difficult to obtain or understand (Hastings and Tejeda-Ashton (2008), Hastings
and Weinstein (2008), Kling et al. (2008), Abaluck and Gruber (2009), DellaVigna (2009))
Competitive firms may not have incentive to educate them (Ellison (2006), Gabaix and
Laibson (2006))
May rely on peers for guidance (Duflo and Saez (2003)), leading to network externalities
which raise barriers to entry (Katz and Shapiro (1994))
Switching costs can lead to suboptimal behavior, dampen price competiton (Klemperer
(1995), Farrell and Klemperer (2007); Madrian and Shea (2001), Beshears et al. (2006), and
Carroll et al. (2009))
Goals of Project
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Use detailed administrative data from Mexican
Social Security System to examine
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How consumers decide to manage their private
pension accounts
Test how switching costs, peers, advertising,
government information effect account
management decisions
Draw implications for price competition,
government design of markets, directions for
future research
Mexico’s Privatized Social Security Market
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Privatized market in 1997, established private accounts
Market during our time period – 2004-2006
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Approved fund providers (Afores) ; 13 – 21 in operation in the
market
Regulated funds (2 Siefores each; no persistent market
outperformance)
Centralized administration to decrease fixed costs
Contributions of 6.5% of wage, accrues in account until retirement
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Affiliates can choose an Afore, switch with low cost between them
Afores charged 2 fees: flow fee and balance fee
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Early withdrawal for unemployment insurance, expense of marriage
No fee for moving accounts between Afores
Regulator published the CEF (CONSAR equivalent fee) that
distilled these 2 fees into one fee statistic
Afores hire sales agents to visit/call workers to convince them to
switch their account
Data and Empirical Approach
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Data on all accounts
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Employment and contributions – wages, employer id, contributions to SAR account, Afore
Switches – switches between Afores, liquidation amounts and dates
Gender, date of birth, and zip code of residence (in June 2006)
Empirical Approach
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Analyze determinants of when workers switch accounts between Afores
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Discrete time hazard model; logistic regression
Random utility model of Afore choice
Estimate importance of switching costs, peers, brand name and advertising, management fees
Identification
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Switching costs – examine impact of exiting, entering labor force and switching jobs
Peers – construct share of each Afore at place of work.
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Fees (flow and balance)
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Regulatory changes in tenure discounts
Variation in costs across people and within people as employment status changes
Fee changes conditional on Afore fixed-effects; entry of new Afores
CEF
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What is the effect of Afore share on management behavior?
Examine effects of switching jobs to place where your Afore is in the minority
Changes in assumptions that are used to calculate CEF
Advertising
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Sales force exposure; control function approach to identify effect off of factors that shift costs of sales force but not
demand for Afores (Rivers & Vuong (1998), Villas-Boas (1999), Petrin and Train (2006))
Specific Findings
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Timing of account switching:
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Overall, people do little to manage their accounts, switching only
once every 5-6 years on average.
Switching costs are very important:
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Salience is very important:
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Exiting the formal sector decreases probability of switching by 82-86%
Peers/employers are very important for lower-income workers
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Entering period for filing for Unemployment Insurance increases
probability of switching by 370%
Changing job to an employer where current Afore is less popular has
same impact as direct marketing exposure
Changes in prices are relatively ineffective in moving demand
forward in time
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Implies price cuts are not profitable except for smallest firms
Specific Findings
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Timing of account switching: (discrete-time hazard model)
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Overall, people do little to manage their accounts, switching only
once every 5-6 years on average.
Workers switch very infrequently; increasing in income
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Switching costs are very important:
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Exiting the formal sector decreases probability of switching by 82-86%
Peers/employers are very important for lower-income workers
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Entering period for filing for Unemployment Insurance increases
probability of switching by 370%
Salience is very important:
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Lowest wage earners, 0.002; Highest wage earners, 0.0215
Changing job to an employer where current Afore is less popular has
same impact as direct marketing exposure
Changes in prices are relatively ineffective in moving demand
forward in time
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Implies price cuts are not profitable except for smallest firms
Specific Findings
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What determines Afore choice: (random utility model)
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Pessimistic findings: demand is price inelastic
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Less elastic to harder-to-determine actual cost
More elastic to government sponsored measure of fees
Both are increasing in income; but not by much
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Optimistic findings
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Low income workers focus on peers, brand name
High income workers more likely to chase past returns (even though Afores do not
display persistent market outperformance)
Investors are responsive to advertising; particularly among low income workers
Requirements that switching accounts sign that they have viewed CEF table
has positive impact on elasticity w.r.t. CEF – increases sensitivity by 20%
Sales agents decrease dependence on peers
However, advertising also increases responsiveness to 12 months past returns
Suggests that
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Regulation on information; marketing can improve price sensitivity at time of
choice
Coordinating market, designing accounts with periodic immediate usefulness of
savings can increase demand elasticity over time.
Concluding thoughts; future research
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Consumer behavior mitigates price competition in private accounts
market
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Inattention to accounts with subscription good market
Consumers are not price sensitive; behave as if information costs are
high generating network effects and competition on advertising
Absent threat of regulation, prices would have been higher
Suggests that market design and marketing can have big benefits
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Coordinating demand side, allowing for early contact with account can
increase demand elasticity significantly
Lowering switching costs may also have an impact
Information framing and government provision of information may really
move demand
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Hastings & Tejeda-Ashton (2008)
Field experiments in Mexico and Chile
Moving part of the market towards price elasticity may have large
equilibrium effects