Working Paper: NBER ID: w14538
Authors: Justine S. Hastings; Lydia Tejeda-Ashton
Abstract: We use responses to a survey and experiment with participants in Mexico's privatized social security system to examine how financial literacy impacts workers' choice behavior and how simplifying information on management fees may increase measures of price elasticity sensitivity among the financially illiterate. We find that by presenting fees in pesos instead of annual percentage rates, financially illiterate workers focus much more on fees when choosing between investment funds, selecting funds with lower average fees in hypothetical choice settings. Even though changes in information have small impacts on fees of the selected fund, holding fees constant, we show that changes in choice behavior imply a substantial increase in price sensitivity. Hence, the way in which information is presented to workers can have a substantial impact on optimal fees that firms can charge in the marketplace.
Keywords: financial literacy; demand elasticity; social security; Mexico
JEL Codes: H0; H55; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presenting fees in pesos (F31) | price sensitivity of financially illiterate workers (D12) |
| financial literacy (G53) | price sensitivity of financially illiterate workers (D12) |
| presenting fees in pesos (F31) | focus on fees (G29) |
| focus on fees (G29) | investment choices towards funds with lower fees (G11) |
| financial literacy (G53) | weight placed on fees in decision-making (G11) |
| presenting fees and past returns (G12) | importance of fees (D40) |
| financial literacy (G53) | reliance on brand names (M37) |
| information presentation (Y20) | optimal fees in the market (D40) |
| information presentation (Y20) | price sensitivity of consumers (D12) |