Investor Behavior and Fund Performance under a Privatized Retirement Accounts System: Evidence from Chile

In the U.S. and in Chile, there have been heated debates about the relative merits of a decentralized privatized pension system relative to a more traditional social security system. On the firm side, there are concerns that pension funds engage in anticompetitive behavior and take advantage of consumers’ by charging high fees and account maintenance changes. On the consumer side, there are concerns that consumers do not select wisely among funds and take on too much risk. Any pension system with insurance features to protect against low levels of pension accumulations is potentially subject to moral hazard problems, in the form of consumers’ taking on too much risk. In the case of Chile, the government provides a minimum pension benefit to those with low pension accumulations, which can make some consumers more willing to take risks. For these reasons, the Chilean government introduced regulations on pension fund firms’ investments designed to limit risk. This paper analyzes the determinants of consumers’ choices of pension fund and of pension fund characteristics (performance and fees), taking into account governmental regulations. In particular, it estimates a demand and supply model of the pension fund investment market using a longitudinal household dataset gathered in 2002 and 2004 in Chile, administrative data on fund choices, and longitudinal data on cost determinants of pension funds. We find that the existing regulation actually increases the level of risk in the market, reduces heterogeneity across firms, and reduces incentives for consumers to participate in the pension fund program. We suggest alternative more effective forms of regulation.

Using Hit Rates to Test for Racial Bias in Law Enforcement: Vehicle Searches in Wichita

This paper considers the use of outcomes-based tests for detecting racial bias in the context of police searches of motor vehicles. It shows that the test proposed in Knowles, Persico and Todd (2001) can also be applied in a more general environment where police officers are heterogenous in their tastes for discrimination and in their costs of search and motorists are heterogeneous in their benefits and costs from criminal behavior. We characterize the police and motorist decision problems in a game theoretic framework and establish properties of the equilibrium. We also extend of the model to the case where drivers’ characteristics are mutable in the sense that drivers can adapt some of their characteristics to reduce the probability of being monitored. After developing the theory that justifies the application of outcomes-based tests, we apply the tests to data on police searches of motor vehicles gathered by the Wichita Police department. The empirical findings are consistent with the notion that police in Wichita choose their search strategies to maximize successful searches, and not out of racial bias.Racial Profiling, Crime, Police, Wichita

Using Hit Rate Tests to Test for Racial Bias in Law Enforcement: Vehicle Searches in Wichita

This paper considers the use of outcomes-based tests for detecting racial bias in the context of police searches of motor vehicles. It shows that the test proposed in Knowles, Persico and Todd (2001) can also be applied in a more general environment where police officers are heterogenous in their tastes for discrimination and in their costs of search and motorists are heterogeneous in their benefits and costs from criminal behavior. We characterize the police and motorist decision problems in a game theoretic framework and establish properties of the equilibrium. We also extend the model to the case where drivers' characteristics are mutable in the sense that drivers can adapt some of their characteristics to reduce the probability of being monitored. After developing the theory that justifies the application of outcomes-based tests, we apply the tests to data on police searches of motor vehicles gathered by the Wichita Police deparment. The empirical findings are consistent with the notion that police in Wichita choose their search strategies to maximize successful searches, and not out of racial bias.

Using a Social Experiment to Validate a Dynamic Behavioral Model of Child Schooling and Fertility: Assessing the Impact of a School Subsidy Program in Mexico

This paper studies the performance of a methodology that can be used to evaluate the impact of new policies that radically depart from existing ones. It uses data gathered from a randomized schooling subsidy experiment in Mexico (i) to estimate and validate a dynamic behavioral model of parental decisions about fertility and child schooling, (ii) to forecast long-term program impacts that extend beyond the life of the experiment, and (iii) to assess the impact of a variety of counterfactual policies. The behavioral model is estimated using data on families in the randomized-out control group and in the treatment group prior to the experiment, both of which did not receive any subsidy. Child wages provide a valuable source of variation in the data for identifying subsidy effects. Using the estimated model, we predict the effects of school subsidies according to the schedule that was implemented under the Mexican PROGRESA program.schooling, child labor, fertility, structural estimation, social experiments

How Pension Rules Affect Work and Contribution Patterns: A Behavioral Model of the Chilean Privatized Pension System

Chile has been at the forefront of pension reform, having switched in 1980 from a pay-as-you-go system to a fully funded privatized accounts system. The Chilean system served as a model for reform in many other Latin American countries and has also been considered by U.S. policy makers as a possible prototype for social security reform. Some of the criticisms of the Chilean system are low coverage rates and contributions rates among certain segments of the population. In 2006, the Chilean government proposed some reforms aimed at increasing coverage and contribution rates and expanding the safety net provided by the system to poor households. This study evaluates how changes in pension system rules affect working behavior and pension contribution patterns using data from a new Chilean household survey administered in 2002 and 2004 linked with administrative data from the pension regulatory agency. It develops and estimates a dynamic model of decision-making about working in the covered or uncovered sectors of the economy and studies implications for pension accumulations. The estimated model is used to simulate behavior under different pension system rules, such as a change in the number of years of contributions required for the minimum pension or a change in pension plan fees.

The longer-term effects of human capital enrichment programs on poverty and inequality : Oportunidades in Mexico

Previous empirical research has shown that Mexico’s Oportunidades program has succeeded in increasing schooling and improving health of disadvantaged children. This paper studies the program’s potential longer-term consequences for the poverty and inequality of these children. It adapts methods developed in DiNardo, Fortin and Lemieux (1996) and incorporates existing experimental estimates of the program’s effects on human capital to analyze how Oportunidades will affect future earnings of program participants. We nonparametrically simulate earnings distributions, with and without the program, and predict that Oportunidades will increase future mean earnings but have only modest effects on poverty rates and earnings inequality.Oportunidades, Human capital, Schooling, Health, Poverty, Inequality.

The Production of Cognitive Achievement in Children: Home, School and Racial Test Score Gaps

This paper studies the determinants of children’s scores on tests of cognitive achievement in math and reading. Using rich longitudinal data on test scores, home environments, and schools, we implement alternative specifications for the production function for achievement and test their assumptions. We do not find support for commonly used restrictive models that assume test scores depend only on contemporaneous inputs or that assume conditioning in a lagged score captures the effects of all past inputs. Instead, the results show that both contemporaneous and lagged inputs matter in the production of current achievement and that it is important to allow for unobserved child-specific endowment effects and endogeneity of inputs. Using a specification that incorporates these features, we analyze sources of test score gaps between black, white and Hispanic children. The estimated model captures key patterns in the data, such as the widening of minority-white test score gaps with age, which is most pronounced for black children.Education production function, racial test score gaps, school quality, child development and cognitive achievement

A Note on Adapting Propensity Score Matching and Selection Models to Choice Based Samples

The probability of selection into treatment plays an important role in matching and selection models. However, this probability can often not be consistently estimated, because of choice-based sampling designs with unknown sampling weights. This note establishes that the selection and matching procedures can be implemented using propensity scores fit on choice-based samples with misspecified weights, because the odds ratio of the propensity score fit on the choice-based sample is monotonically related to the odds ratio of the true propensity scores.choice-based sampling, matching models, propensity scores, selection models

Ex Ante Evaluation of Social Programs

This paper discusses methods for evaluating the impacts of social programs prior to their implementation. Ex ante evaluation is useful for designing programs that achieve some optimality criteria, such as maximizing impact for a given cost. This paper illustrates through several examples the use of behavioral models in predicting the impacts of hypothetical programs. Among the programs considered are wage subsidy programs, conditional cash transfer programs, and income support programs. In some cases, the behavioral model justifies a completely nonparametric estimation strategy, even when there is no direct variation in the policy instrument. In other cases, stronger modeling and/or functional form assumptions are required to evaluate a program ex ante. We illustrate the application of ex ante evaluation methods using data from the PROGRESA school subsidy experiment in Mexico. We assess the effectiveness of the method by comparing ex ante predictions of program impacts to the impacts measured under the randomized experiment.ex-ante evaluation, matching, evaluation methods, school subsidy programs

How Beliefs about HIV Status Affect Risky Behaviors: Evidence from Malawi, Second Version

This paper examines whether and to what extent changes in beliefs about own HIV status induce changes in risky sexual behavior using data from married males living in three regions of Malawi. Risky behavior is measured as the propensity to engage in extramarital affairs. The empirical analysis is based on panel surveys for years 2006 and 2008 from the Malawi Diffusion and Ideational Change Project (MDICP), which contain detailed information on beliefs about HIV status and on sexual behaviors. Many individuals change their beliefs over time, because of opportunities to get tested for HIV and informational campaigns. We estimate the effect of belief revisions on the propensity to engage in extra-marital affairs using a panel data estimator developed by Arellano and Carrasco (2003), which accommodates unobserved heterogeneity as well as belief endogeneity arising from the dependence of current beliefs on lagged behaviors. We find that downward revisions in the belief of being HIV positive lead to an increased propensity to engage in extra-marital affairs and upward revisions to a decreased propensity. The estimates are shown to be robust to underreporting of affairs. Using our estimates and a standard epidemeological model of disease transmission, we find that increasing the responsiveness of beliefs to test results would reduce the HIV transmission rate as infected individuals reduce sexual behavior and decrease the likelihood that uninfected persons have contact with an HIV-positive person.AIDS, Malawi, Beliefs