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Survival ambiguity and welfare

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  • Caliendo, Frank N.
  • Gorry, Aspen
  • Slavov, Sita

Abstract

Nearly all life-cycle models adopt Yaari’s (1965) assumption that individuals know the survival probabilities that they face. Given that an individual’s exact survival probabilities are likely unknown, we explore the implications of relaxing this assumption. If there is no annuity market, then the welfare cost of survival ambiguity is large and regressive. Ambiguity neutral individuals would pay as much as 1% of total lifetime consumption for immediate resolution of ambiguity and the bottom income quintile is 4 times worse off than the top quintile. Alternatively, with the availability of competitive annuity contracts, survival ambiguity is welfare improving because it allows competitive insurance companies to pool risk across survival types. Even though Social Security and annuities share some properties, Social Security does not help to hedge survival ambiguity.

Suggested Citation

  • Caliendo, Frank N. & Gorry, Aspen & Slavov, Sita, 2020. "Survival ambiguity and welfare," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 20-42.
    • Handle: RePEc:eee:jeborg:v:170:y:2020:i:c:p:20-42
    DOI: 10.1016/j.jebo.2019.11.011
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    2. Chen, An & Hieber, Peter & Rach, Manuel, 2021. "Optimal retirement products under subjective mortality beliefs," Insurance: Mathematics and Economics, Elsevier, vol. 101(PA), pages 55-69.

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    More about this item

    Keywords

    Ambiguity; Longevity Risk; Survival; Annuities; Social Security;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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