Summary
This paper examines the interaction between the market for annuities and retirement and consumption decisions in the presence of lifetime uncertainty. We focus on two aspects of the demand for annuities: the timingof annuitization and the information available to the issuers of annuities with regard to purchasers’ survival probabilities. The First-Best is attained by continuous annuitization of savings, with a guaranteed lump-sum payment to beneficiaries upon death. Annuitization of savings at retirement, and a-fortioti no annuitization, are inferior and lead to distortions in retirement and consumption decisions. Applying a ‘Stochastic Dominance’ approach, we show how these decisions depend on individuals’ degree of risk aversion. Under imperfect information, we analyze Pooling Equilibria and compare them with the First-Best.
This paper was written while I was visiting Princeton University in the Fall of 1998.1 wish to thank my colleagues and friends at Princeton for their hospitality. I also wish to acknowledge useful comments received from Kenneth Arrow, Peter Diamond and Sergiu Hart.
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Sheshinski, E. (2004). Annuities and retirement. In: Aliprantis, C.D., Arrow, K.J., Hammond, P., Kubler, F., Wu, HM., Yannelis, N.C. (eds) Assets, Beliefs, and Equilibria in Economic Dynamics. Studies in Economic Theory, vol 18. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-05858-9_5
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DOI: https://doi.org/10.1007/978-3-662-05858-9_5
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