Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization
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.
- Abel, A. B. (1986) Capital accumulation and uncertain lifetimes with adverse selection. Econometrica 54: pp. 1079-1098 CrossRef
- Cannon, E., Tonks, I. (2008) Annuity markets. Oxford University Press, Oxford CrossRef
- Heijdra, B. J. & Mierau, J. O. (2012). The individual life-cycle, annuity market imperfections and economic growth. Journal of Economic Dynamics and Control (forthcoming).
- Heijdra, B. J., Mierau, J. O., & Reijnders, L.S.M. (2010). The tragedy of annuitization. Working paper 3141, München: CESifo.
- Heijdra, B. J. & Reijnders, L.S.M. (2009). Economic growth and longevity risk with adverse selection. Working paper 2898, München: CESifo.
- Palmon, O., Spivak, A. (2007) Adverse selection and the market for annuities. Geneva Risk and Insurance Review 32: pp. 37-59 CrossRef
- Pauly, M. V. (1974) Overinsurance and public provision of insurance: The role of moral hazard and adverse selection. Quarterly Journal of Economics 88: pp. 44-62 CrossRef
- Pecchenino, R. A., Pollard, P. S. (1997) The effects of annuities, bequests, and aging in an overlapping generations model with endogenous growth. Economic Journal 107: pp. 26-46 CrossRef
- Rothschild, M., Stiglitz, J. (1976) Equilibrium in competitive insurance markets: An essay on the economics of imperfect information. Quarterly Journal of Economics 90: pp. 629-649 CrossRef
- Sheshinski, E. (2008) The economic theory of annuities. University press, Princeton: Princeton, N.J.
- Villeneuve, B. (2003) Mandatory pensions and the intensity of adverse selection in life insurance markets. Journal of Risk and Insurance 70: pp. 527-548 CrossRef
- Walliser, J. (2000) Adverse selection in the annuities market and the impact of privatizing social security. Scandinavian Journal of Economics 102: pp. 373-393 CrossRef
- Yaari, M. E. (1965) Uncertain lifetime, life insurance, and the theory of the consumer. Review of Economic Studies 32: pp. 137-150 CrossRef
- Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization
- Open Access
- Available under Open Access This content is freely available online to anyone, anywhere at any time.
Volume 160, Issue 3 , pp 311-337
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Annuity markets
- Adverse selection
- Overlapping generations
- Industry Sectors