|
Adverse Selection and the Market for Annuities
Oded Palmon* Avia Spivak**
The full article, in PDF file - 272Kb
Abstract
Adverse selection is often blamed for the thinness of the annuities market. We study alternative types of annuity contracts that differ in the survival information structure, and explore their welfare implications. We show that, in principle, it is preferable to contract before the survival information is revealed, i.e., the deferred annuities equilibrium is better than the adverse selection equilibrium of immediate annuities. Quantitatively, however, the two arrangements are very close in terms of expected welfare. Our simulations show a welfare loss of around one percent for annuitants using the immediate annuities adverse selection market, relative to the first best allocation. We conclude that adverse selection is not the cause for the thinness of the annuities market.
Key words: adverse selection, annuities, insurance, information, Social Security reform, Defined Benefits, Defined Contribution.
JEL Classification: H55, G22, G28
The full article, in PDF file - 272Kb
_____________
|
* |
Department of Finance and Economics, Rutgers University, NJ. |
|
** |
Department of Economics, Ben-Gurion University, Beer-Sheva 84105, Israel.
We thank Jeff Brown, Estelle James, Olivia Mitchell, Dan Peled, Eithan Sheshinski, Ben Sopranzetti, John Wald, Mark Warshawski, David Wettstein and participants of seminars at Bar-Ilan, Hebrew and Rutgers Universities for helpful Comments. |
|
