15 specialized technology through their association with international firms. In contrast, static scale economies are out of reach to small countries.

63. The available information does not allow us to discard the hypothesis that there also exist significant scale economies in collection over the number of contributors and employers observed in small countries. For example, the fact that all Chilean pension fund administrators (AFPs) with less than 100,000 members have decided not to integrate into collection (to avoid the fixed cost of the specialized technology) does not settle the issue of whether static or dynamic scale economies are present. This evidence may be representative of a past when Chile was the only country with competitive pension management companies, or it may show the importance of static scale economies. Evidence of these scale economies may be seen in the fact that SERVIPAG, a specialized Chilean collection company that services financial companies, utilities, and small pension fund management companies, has not been challenged by large-scale entry of other firms into this market. However, this same evidence may be seen as the result of restrictions on bank and AFP entry into this specialized business.

64. Economies of scale do obtain in a small country. In this case, both conditions for natural monopoly (sunk and fixed costs) would be present. If the relative size of these economies were substantial, competition among pension management companies that are vertically integrated into collections would favor the largest ones at the local level. In a small country, this process would lead to a concentrated market structure and higher charges, and to concentration of the trustee function. Given the negative impact of this latter outcome on the political risk affecting pensions, there may be a case for the government to intervene in collections.

65. The required intervention would be to prohibit vertical integration of collection and processing of contributions with the other functions. The gain from prohibiting vertical integration is that it prevents concentration of the trustee function. However, forced disintegration does impose costs. For example, looking in the membership archives held by the account manager allows a cheap solution to some types of errors, while avoiding contact with the employer. Some of these savings can also be obtained by a monopoly collector arranging to be in contact with the processing center of each pension management company. We now consider several options to organize the provision of collections services, given the mandated disintegration of this service.

66. **Policy options in collection and raw processing of contributions.** The first option is a nationalized monopoly. This appears attractive in small countries that have a well-functioning personal income tax collection system, because collections related to pensions can piggyback on that infrastructure. This has been tried in Argentina through DGI, a government-run entity, and could be attempted in small countries such as Costa Rica that have a fairly well-functioning personal income tax collection system. The costs of collections per form charged by DGI is US$ 4.0, and there is just one invoice _(planilla)_ per employer. An important problem with this option is that a government collection agency may not have incentives to adopt the most cost efficient technologies for collections, but rather may wish to offer more employment to relatives and political supporters. For example, DGI uses a lot of manual labor and has yet to adapt the new technologies. A second important problem is that the nationalized monopoly may charge a large monopoly margin not subject to regulation, which acts as a hidden, unlegislated tax on labor. these factors may explain why the price for collections charged by DGI is four times that charged by Chilean banks, and at least 12 times the cost of large vertically integrated AFPs.