Regulation by Public Options: Evidence from Pension Funds

In this paper, we analyze the equilibrium welfare effects of using public options to regulate market power in the market for individual capitalization pension systems. We develop and estimate a dynamic model of demand and supply in the market for pension funds. We find that the presence of a public option reduces equilibrium fees, benefiting all enrollees. Replacing the public option with a private one would increase the fees of the private firms by 16% on average and would more than double the fee of the substitute private option. Additionally, price regulation based on the public option would reduce firms' economic profits almost to the minimum.