Advertising and Competition in Privatized Social Security: The Case of Mexico

There is an increasing movement to give workers greater control over pensions, allowing them to personally manage their retirement investments. The recent trend away from pay-as-you-go social security programs towards fully-funded, individual-account systems is a prominent example. Competition and privatization are often touted as potential cures for the agency, efficiency and solvency problems of traditional pay-as-you-go pension schemes (Feldstein (2005)). In theory, privatization of social insurance should lead to competition among asset management firms, providing incentives for efficiency, as affiliates choose among fund managers to maximize expected wealth at retirement given contributions. However, experience in commonplace retail goods suggests that the law of one price often fails to hold even for physically identical products. Evidence from financial markets reveals many of the same issues. Considerable price dispersion has been noted in the market for credit cards, index funds, mortgages, and in privatized social security systems (respectively, While some of these studies rationalize price dispersion as arising from information frictions such as search costs (Hortacsu and Syverson 2004, Hall and Woodward 2010), others find that even when price information is provided to consumers, consumers often select based on fund brand name rather than price (Choi et al. 2009). Indeed there is growing field evidence that investors are often overly responsive information framing and short-term incentives when selecting fund managers (Duarte and Along with price competition, advertising has proved to be an important competitive component in markets for consumer financial products. The US mutual fund industry spends about $6 billions of dollars annually on advertising (Cronqvist 2006). 1 1 Cronqvist (2006) finds that US mutual fund flows respond positively to advertising and other information irrelevant to net returns. As to whether such advertising is socially beneficial or harmful, however, extant theoretical models do not provide a unified policy front. Advertising that 'informs' consumers can reduce frictions and intensify price competition, increasing consumer surplus through market expansion (Butters 1977; Grossman and Shapiro 1984). However, advertising that 'persuades' consumers to focus on 2 brand name or 'complements' consumption with prestige can lower price competition as consumers focus on non-price attributes-real or perceived-when selecting products In the context of social security privatization, a forced savings-for-retirement program, understanding how investors react to advertising and how this affects management fees collected by fund administrators takes on new importance. This paper presents evidence on how advertising impacts competition and equilibrium prices in the context of a privatized pension …