NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Justine S. Hastings, Ali Hortaçsu, Chad Syverson

NBER Working Paper No. 18881
Issued in March 2013
NBER Program(s):   AG   IO   PE

This paper examines how advertising impacts competition and equilibrium prices in the context of a privatized pension market. We use detailed administrative data on fund manager choices and worker characteristics at the inception of Mexico’s privatized social security system, where fund managers had to set prices (management fees) at the national level, but could select sales force levels by local geographic areas. We develop a model of fund manager choice, price and advertising competition (in terms of sales force deployment), nesting models of informative and persuasive advertising. We find evidence in favor of the persuasive view; exposure to sales force lowered price sensitivity and increased brand loyalty, leading to inelastic demand and high equilibrium fees. We simulate oft-proposed policy solutions: a supply-side policy with a competitive government player, and a demand-side policy which increases price elasticity. We find that demand-side policies are necessary to foster competition in social-safety-net markets with large segments of inelastic consumers.

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This paper was revised on January 3, 2014

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Document Object Identifier (DOI): 10.3386/w18881

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