Job Market Paper

Intermediation, Choice Frictions, and Adverse Selection: Evidence from the Chilean Pension Market

2023 Best Job Market Paper Award (European Economic Association and UniCredit Foundation)

This paper analyzes the consumer-welfare effects of intermediaries in a pension and annuity market with selection. Intermediaries provide advice, helping individuals improve decisions when understanding products is complex and costly but may introduce distortions due to agency problems. In an insurance market, intermediary effects on choices can impact adverse selection and, through it, prices. I document the importance of intermediation and its connection to adverse selection in the Chilean pension market, where products are complex and intermediaries have a financial incentive to steer consumers toward annuities. To quantify the effects of potential intermediary regulations, I develop and estimate a dynamic demand model that includes life-cycle decisions, product, and intermediation choices. I find intermediaries have the potential to improve welfare: retirees would give around 250 USD a year to eliminate frictions in product choices. Intermediaries steer a majority of their customers into annuities; however, a ban is approximately consumer-welfare neutral. The variety of annuities allows intermediaries to recommend close substitutes to the outside option, limiting the harm from misaligned incentives. Upon banning intermediaries, the costs of making decisions without advice are initially outweighed by avoided distortions induced by intermediaries. However, annuity price increases due to adverse selection erode the gains. In light of policy concerns regarding the role of intermediaries, my results highlight the potential value provided by advisors – even with biased incentives – when choices are complex and stakes are high.

Work in Progress

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with Jordan Richmond and Eric Zwick (approved IRS project)

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with Álvaro Carril

updated soon!