June 1, 2018

Asymmetric Information, Investing, And Plan Member Wealth Extraction: New Evidence From Sweden And Australia

“Wages in the Swedish financial sector have experienced an extraordinary increase over the last few  decades. However, we find no evidence that the selection of talent into finance has improved. This suggests that finance workers are capturing substantial rents that have increased over time.”


“The lacklustre investment performance of the Superannuation System may be attributed significantly to Retail Funds, which underperform other Public Offer Funds, on long-term averages, by about 2% per annum.”

“The current government seems to be doing its best to destroy Australian superannuation. The Bill for “strengthening trustee pension arrangements” actually weakens them and therefore should be rejected by Parliament.”



"Capturing Substantial Rents” 

One of the more interesting academic research papers I have read recently is titled “Since You’re So Rich, You Must Be Really Smart: Talent and the Finance Wage Premium”. In it, authors Bohm, Metzger, and Stromberg note that over the course of the last 25 years, the already high relative compensation levels of people working in the Swedish finance sector rose from 120% of average private sector wages to almost 170%. They point to similar findings in other developed countries. They posit that in properly functioning labour markets, these material relative increases should have been due to the rising relative skills and hence rising productivity of people working in the finance sector.

They go on to test if this was really the case. To that end, they develop a unique database of innate talent metrics (both cognitive and non-cognitive) for the Swedish labour force to test if entrants into the finance sector over the last 25 years exhibited a greater rate of increase in talent than entrants into other sectors of the economy. They found that this was not the case. So what then explains the increasing wage gap between people working in the finance sector and those working in other sectors? As a possible explanation, they note the rising profitability of the finance sector relative to other industry sectors, not just in Sweden but elsewhere as well. And what might be causing this? They point to ‘imperfect competition’ leading to ‘excess profits’ which the finance sector shares with its workers.

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