De Economist

, Volume 160, Issue 3, pp 311–337

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

Open Access
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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

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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