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Can auctions increase competition in the pension funds market? The Chilean experience

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  • Harrison, Rodrigo
  • Parada-Contzen, Marcela
  • Villena, Marcelo

Abstract

This paper analyses the auction policy over enrollees’ monopoly rights introduced in the Chilean pension system. This policy was designed to promote competition in the pension fund market driven by private firms, after 30 years of operation. Since the Chilean pension fund system has inspired dozens of countries in the last forty years, the analysis of the design and performance of its relatively new auction mechanism is of worldwide interest. We present a theoretical and empirical model. Our theoretical model illustrates firms’ incentives to participate in the auction process. Our empirical analysis focuses on the effect of auctions on outcomes, such as fees, mark-ups, demand price elasticity, returns, and risk premiums. Despite the evidence shown for the positive benefits of the auction implementation, the current mechanism design is not considering that the biggest issue is the low individuals’ price response levels. Importantly, the current auction design only incentivizes new entrants to participate. Thus, the design generates low competition in the auction processes. Proper design should incentivize all firms to participate. Besides, we find that consumers’ price elasticity increased after the implementation of auctions, although demand is still generally inelastic. Interestingly, non-winning auction firms did not react in fees but may have reacted in other characteristics, such as returns and risk premiums.

Suggested Citation

  • Harrison, Rodrigo & Parada-Contzen, Marcela & Villena, Marcelo, 2023. "Can auctions increase competition in the pension funds market? The Chilean experience," Journal of Policy Modeling, Elsevier, vol. 45(5), pages 975-993.
  • Handle: RePEc:eee:jpolmo:v:45:y:2023:i:5:p:975-993
    DOI: 10.1016/j.jpolmod.2023.07.002
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    More about this item

    Keywords

    Pension funds; Auction mechanism; Competition;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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