Department of Economics

Switching Costs in Pension Plan Choice

How well do market mechanisms for retirement savings function when there are switching costs? This work answers this question by estimating a dynamic demand model with switching costs for pension fund administrator choice in Chile’s privatized pension market. This market exhibits significant price dispersion and very low switching rates, and switching costs are often mentioned as a likely driver of this outcome. If this is the case, then regulatory intervention to lower switching costs may increase welfare. This is not only important for the functioning of the Chilean pension market, but also more generally for other settings where governments mandate consumer participation and set the default as continuing in the same firm as last period. A key challenge in dynamic demand models is the fact that consumers form expectations about the future evolution of product characteristics and base their choices on them. Using a new methodology, based on a combination of revealed preference inequalities and latent variable integration, this work takes these expectations into account without having to model them explicitly, while using exclusion restrictions to separate switching costs from unobserved preference heterogeneity. I find evidence for a lower bound on switching costs of $1,400 dollars, a number significantly higher than that found in previous work. Furthermore, I find evidence that consumers over-value returns differences across pension fund administrators relative to price differences. Observed prices are, on average, roughly twice as high as in a no switching cost counterfactual, suggesting that policy interventions to lower switching costs would be beneficial.

Market Structure and Product Assortment: Evidence from a Natural Experiment in Liquor Licensure (with Sarah Moshary)

We examine how market structure, measured as the number of firms, affects prices, quantities, product assortment, and consumer surplus. Our analysis exploits Washington’s deregulation of spirit sales, which generated exogenous variation in market structure across the state. Consistent with the uniform pricing literature, we find no effect of increased competition on prices. Rather, we document an expansion of product assortment, which in turn increases purchasing. Using a discrete-choice demand model, we estimate that wider assortments increase consumer surplus by $3.20/month when moving from monopoly to duopoly. However, this increase is largest for heavy drinking households, raising concerns about social welfare.

Retirement Policy and Annuity Market Equilibria: Evidence from Chile (with Manisha Padi)

(Previously circulated as “Competition, Asymmetric Information, and the Annuity Puzzle: Evidence from a Government-run Exchange in Chile”)

Revision requested at Econometrica

Previous research has documented an “annuity puzzle”, the empirical regularity that retirees hold too small a fraction of wealth in annuities. To understand the role of pension system design in creating this puzzle, we study Chile’s pension system, where the annuitization rate is over 70%. By estimating retiree preferences for retirement assets and the cost of annuitization, we show that Chile’s exception to the annuity puzzle is driven by the lack of a mandatory social insurance component and by restrictions on lump sum withdrawals. Reforming these rules would lower annuitization rates and average welfare, but would increase welfare for those at the highest levels of longevity risk. We establish that different coverage levels for mandatory insurance induce a trade-off between providing protection for longevity risk and average welfare, and provide guidance for policy makers seeking to reform the rules governing how retirees can access their retirement savings.

Fiduciary Duty and the Market for Financial Advice (with Vivek Bhattacharya and Manisha Padi)

Revised and resubmitted for Econometrica

Fiduciary duty aims to solve principal-agent problems, and the United States is in the middle of a protracted debate surrounding the merits of extending it to all financial advisers. Leveraging a transaction-level dataset of deferred annuities and state-level variation in common law fiduciary duty, we find that it raises risk-adjusted returns by 25 bp and leads to a 16% decline in the entry of affected firms. Through the lens of a model of entry and advice provision, we argue that this effect can be due to both an increase in compliance costs and an increase in the cost of providing low quality advice. We show how to disentangle these channels and find that both are empirically relevant. Counterfactual simulations show that further increases in the stringency of fiduciary duty monotonically improve advice quality.

Deregulation through Direct Democracy: Lessons from Liquor Markets (with Sarah Moshary)

This paper examines the merits of state control versus private provision of spirits retail, using the 2012 deregulation of liquor sales in Washington state as an event study. This is the first shift from a public to a private system for spirits sales in the United States since Prohibition. We document effects along a number of dimensions: prices, product variety, convenience, substitution to other goods, state revenue, and consumption externalities. We estimate a demand system to evaluate the net effect of privatization on consumer welfare. Our findings suggest that deregulation harmed the median Washingtonian, even though residents voted in favor of deregulation by a 16% margin. Further, we find that vote shares for the deregulation initiative do not reflect welfare gains at the ZIP code level. We discuss implications of our findings for the efficacy of direct democracy as a policy tool.

The Design of Defined Contribution Plans (with Vivek Bhattacharya)

Revision requested at Econometrica

Defined contribution (DC) plans are one of the primary vehicles through which Americans save for retirement, with almost $10 trillion in assets under management. There is significant heterogeneity in terms of the quality and availability of these plans. We develop a model of the market for plan provision in which employers and providers bargain over plan design, and we allow for various forces that could rationalize this heterogeneity: differences in demand for funds, differences in costs of plan provision, and economies of scale. Disentangling the source of this heterogeneity allows us to evaluate proposed regulations, including allowing multiemployer plans and mandating aspects of plan design. We find that multiemployer plans are ineffective at expanding access to DC plans, while must-carry provisions reduce expenses paid by workers at the cost of some plans closing.

Merger Effects and Antitrust Enforcement: Evidence from US Consumer Packaged Goods (with Vivek Bhattacharya and David Stillerman)

How stringent is antitrust enforcement in the United States? We address this question by documenting the effects of completed mergers in consumer packaged goods and predicting how they would change under stricter antitrust regimes. We find that mergers raise prices by 1.5% and decrease quantities sold by 2.3%, on average. Importantly, there is substantial heterogeneity in these effects: a quarter of mergers decrease prices by at least 5.1%, while another quarter increase prices by at least 5.8%. We embed these estimates into a model of antitrust enforcement and find that agencies block mergers they expect will raise prices by more than 8–9%. Many anti-competitive mergers proceed at this threshold; pro-competitive ones are rarely blocked. Lowering the threshold reduces the probability of allowing anti-competitive mergers without a substantial increase in the probability of blocking pro-competitive ones. The cost is that the number of cases the agencies must challenge could increase drastically.

A User’s Guide for Inference in Models Defined by Moment Inequalities (with Ivan A. Canay and Amilcar Velez)

Accepted at The Journal of Econometrics

Models defined by moment inequalities have become a standard modeling framework for empirical economists, spreading over a wide range of fields within economics. From the point of view of an empirical researcher, the literature on inference in moment inequality models is large and complex, including multiple survey papers that document the non-standard features these models possess, the main novel concepts behind inference in these models, and the most recent developments that bring advances in accuracy and computational tractability. In this paper we present a guide to empirical practice intended to help applied researchers navigate all the decisions required to frame a model as a moment inequality model and then to construct confidence intervals for the parameters of interest. We divide our template into four main steps: (a) a behavioral decision model, (b) moving from the decision model to a moment inequality model, (c) choosing a test statistic and critical value, and (d) accounting for computational challenges. We split each of these steps into a discussion of the “how” and the ”why”, and then illustrate how to take these steps to practice in an empirical application that studies identification of expected sunk costs of offering a product in a market.

Frictions in Mortage Refinancing: Evidence from Chile (with Vivek Bhattacharya, Ignacio Cuesta, Ana Maria Montoya and Raimundo Undurraga)

Pre-Analysis Plan

Academic Year 2019 – 2020

450-1 Industrial Organization and Prices
386-2 Econometrics for MMSS

Academic Year 2018 – 2019

450-1 Industrial Organization and Prices
386-2 Econometrics for MMSS

Academic Year 2017 – 2018

450-1 Industrial Organization and Prices (with Bill Rogerson)
450-3 Industrial Organization and Prices (with Vivek Bhattacharya)
386-2 Econometrics for MMSS

Academic Year 2016 – 2017

450-2 Industrial Organization and Prices (with Robert Porter)
450-3 Industrial Organization and Prices (with Robert Porter)
386-2 Econometrics for MMSS