CDHA CAAR

A. “Advertising and Competition in Privatized Social Security: The Case of Mexico,” by Justine S. Hastings, Ali Hortacsu, and Chad Syverson (w18881, March 2013, .pdf format, 53p.).

Abstract:

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.

www.nber.org/papers/w18881

B. “Disability, Earnings, Income and Consumption,” by Bruce D. Meyer and Wallace K.C. Mok (w18869, March 2013, .pdf format, 53p.).

Abstract:

Using longitudinal data for 1968-2009 for male household heads, we determine the prevalence of pre- retirement age disability and its association with a wide range of outcomes, including earnings, income, and consumption. We then employ some of these quantities in the optimal social insurance framework of Chetty (2006) to study current compensation for the disabled. Six of our findings stand out. First, disability rates are high. We divide the disabled along two dimensions based on the persistence and severity of their work-limiting condition. We estimate that a person reaching age 50 has a 36 percent chance of having been disabled at least temporarily once during his working years, and a 9 percent chance that he has begun a chronic and severe disability. Second, the economic consequences of disability are frequently profound. Ten years after disability onset, a person with a chronic and severe disability on average experiences a 79 percent decline in earnings, a 35 percent decline in after-tax income, a 24 percent decline in food and housing consumption and a 22 percent decline in food consumption. Third, economic circumstances differ sharply across disability groups. The outcome decline for the chronically and severely disabled is often more than twice as large as that for the average disabled head. Fourth, our findings show the partial and incomplete roles that individual savings, family support and social insurance play in reducing the consumption drop that follows disability. Fifth, time use and detailed consumption data further indicate that disability is associated with a decline in well-being. Sixth, using the quantities we have estimated, we provide the range of behavioral elasticities and preference parameters consistent with current disability compensation being optimal within the Chetty framework.

www.nber.org/papers/w18869