Regulation by Public Options: Evidence from Pension Funds

Abstract

We study the equilibrium welfare effects of using state-owned enterprises (SOEs) to regulate market power. We estimate a dynamic equilibrium model of Uruguay’s individual capitalization pension system, where a high-quality SOE competes with private firms. We find that the presence of an SOE reduces equilibrium fees and increases investment returns. Eliminating the SOE and replacing it with a private firm would more than double its fee and increase the fees of private firms by 8\%. Reducing workers' inertia cannot fully offset privatization. Finally, direct price regulation outperforms SOE as a competitive force in the market.