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Adverse selection and the market for annuities

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  • Oded Palmon

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  • Avia Spivak
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    Abstract

    Adverse selection is often blamed for the malfunctioning of the annuities market. We simulate the impact of adverse selection on the consumption allocation of annuitants under alternative parameter values, and explore the resulting welfare implications. We show that, for most parameter values, the welfare losses associated with equilibriums that are subject to adverse selection correspond to a loss of wealth of around one percent in a first-best equilibrium. These losses are smaller than the corresponding losses associated with equilibriums with no access to an annuity market by an order of magnitude of ten. The existence of substitutes for annuities such as a bequest motive or a social security system intensifies the adverse selection but reduces its welfare impact. Copyright The Geneva Association 2007

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    Bibliographic Info

    Article provided by Springer in its journal THE GENEVA RISK AND INSURANCE REVIEW.

    Volume (Year): 32 (2007)
    Issue (Month): 1 (June)
    Pages: 37-59

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    Handle: RePEc:kap:geneva:v:32:y:2007:i:1:p:37-59

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    Web page: http://www.springerlink.com/link.asp?id=102897

    Related research

    Keywords: Adverse selection; Annuities; Insurance; Information; Social Security reform; Defined Benefits; Defined Contribution; H55; G22; G28;

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    Cited by:
    1. Ben Heijdra & Laurie Reijnders, 2012. "Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization," De Economist, Springer, vol. 160(3), pages 311-337, September.
    2. Steinorth, Petra, 2012. "The demand for enhanced annuities," Journal of Public Economics, Elsevier, vol. 96(11), pages 973-980.

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