De Economist

, Volume 160, Issue 3, pp 311–337

Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization

Authors

    • Faculty of Economics and BusinessUniversity of Groningen
    • IHS
    • CESifo
    • Netspar
  • Laurie S. M. Reijnders
    • Faculty of Economics and BusinessUniversity of Groningen
    • Netspar
Open AccessArticle

DOI: 10.1007/s10645-012-9191-z

Cite this article as:
Heijdra, B.J. & Reijnders, L.S.M. De Economist (2012) 160: 311. doi:10.1007/s10645-012-9191-z

Abstract

We study the effects on the macroeconomic equilibrium, the wealth distribution, and welfare of adverse selection in private annuity markets in a closed economy inhabited by overlapping generations of heterogeneous agents who are distinguished by their health status. If an agent’s health type is private information there will be a pooling equilibrium in the private annuity market. We also study the implications for the macro-economy and welfare of a social security system with mandatory contributions that are constant across health types. These social annuities are immune to adverse selection and therefore offer a higher rate of return than private annuities do. However, they have a negative effect on the steady-state capital intensity and welfare. The positive effect of a fair pooled rate of return on a fixed part of savings and a higher return on capital in equilibrium is outweighed by the negative consequences of increased adverse selection in the private annuity market and a lower wage rate.

Keywords

Annuity markets Adverse selection Overlapping generations Demography

JEL Classification

D52 D91 E10 J10

Copyright information

© The Author(s) 2012