De Economist

, Volume 160, Issue 3, pp 311–337 | Cite as

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

Open Access
Article

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 

Notes

Open Access

This article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited.

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Copyright information

© The Author(s) 2012

Authors and Affiliations

  1. 1.Faculty of Economics and BusinessUniversity of GroningenGroningenThe Netherlands
  2. 2.IHSViennaAustria
  3. 3.CESifoMunichGermany
  4. 4.NetsparTilburgThe Netherlands

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