Quantifying the Costs of Investment Limits for Chilean Pension Funds

Since the creation of the Chilean pension fund industry in 1981, pension fund administrators have not been free to choose their investment portfolios because of stringent regulation of investment limits. The diagnosis implicit with the imposition of limits was that the Chilean capital market was not deep, that there was an important demand for funds to finance the expansion of the productive sector and that, due to principal–agent problems, protection for uninformed account holders was needed. As this regulation entails an inefficient combination of risk and return, this paper quantifies its costs.