CE Consultant Ellen Li, and co-authors Elena Krasnokutskaya and Petra Todd to publish an upcoming article entitled “Product Choice under Government Regulation: The Case of Chile’s Privatized Pension System” in the International Economic Review.

 

Chile’s long-running individual retirement pension accounts system has been a model for many countries in the world. To limit the riskiness of pension investments, Chile introduced a minimum return regulation that required pension fund management firms to deliver returns that are not more than two percent below of the industry average. This paper develops and estimates an equilibrium model of the pension market and uses the model to understand how minimum return regulation affects this industry. We find that the regulation leads to higher consumer demand for riskier investment products and creates incentives for pension managers to offer riskier portfolios. Hence, contrary to the original intent, such regulation results in higher overall riskiness of pension investments. Moreover, the cost imposed on the industry by this regulation leads to higher pension management fees. Nevertheless, we find that the regulation stimulates balance accumulation which, despite higher risk, ultimately reduces reliance upon government pension support.