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Adverse selection and the market for annuities

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Author Info
Oded Palmon ()
Avia Spivak
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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File URL: http://hdl.handle.net/10.1007/s10713-007-0002-4
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Publisher 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

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

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  4. Walliser, Jan, 2000. " Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(3), pages 373-93, June. [Downloadable!] (restricted)
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    Other versions:
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  16. Martin S. Eichenbaum & Dan S. Peled, 1987. "Capital Accumulation and Annuities in an Adverse Selection Economy," NBER Working Papers 2046, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Cassio M. Turra & Olivia S. Mitchell, 2004. "The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation," Working Papers wp086, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
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  20. Smetters, Kent & Walliser, Jan, 2004. "Opting out of social security," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1295-1306, July. [Downloadable!] (restricted)
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  22. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1997. "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1121-66, December.
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