Regulation by Public Options: Evidence from Pension Funds

Abstract

We study the equilibrium welfare effects of using state-owned enterprises (SOEs) to discipline market power. We estimate a dynamic equilibrium model of Uruguay’s individual capitalization pension system, where a high-quality SOE competes with private firms in the presence of worker inertia. We find that the presence of a SOE lowers equilibrium fees and increases investment returns. Replacing it with a private firm would more than double its fee and raise private firms’ fees by 8 percent. Reducing inertia mitigates but does not offset privatization. Comparing policy instruments, we show that direct price regulation yields higher welfare gains than competition through an SOE.