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Adverse selection in the annuity market with sequential and simultaneous insurance demand

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Author Info

  • Johann K. Brunner

    (Department of Economics, University of Linz, Altenberger Stra�e 69, A-4040 Linz, Austria, e-mail: johann.brunner@jku.at)

  • Susanne Pech

    (Department of Economics, University of Linz, Altenberger Stra�e 69, A-4040 Linz, Austria, e-mail: susanne.pech@jku.at)

Abstract

This paper investigates the effect of adverse selection on the private annuity market in a model with two periods of retirement and two types of individuals, who differ in their life expectancy. In order to introduce the existence of time-limited pension insurance, we consider a model where for each period of retirement separate contracts can be purchased. Demand for the two periods can be decided sequentially or simultaneously. We show that only a situation where all risk types choose sequential contracts is an equilibrium and that this outcome is favourable for the long-living, but is unfavourable for the short-living individuals. The Geneva Risk and Insurance Review (2006) 31, 111–146. doi:10.1007/s10713-006-0558-4

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Risk and Insurance Review.

Volume (Year): 31 (2006)
Issue (Month): 2 (December)
Pages: 111-146

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Handle: RePEc:pal:genrir:v:31:y:2006:i:2:p:111-146

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References

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  1. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
  2. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
  3. Johann K. Brunner & Susanne Pech, 2001. "Adverse Selection in the Annuity Market when Payoffs Vary over the Time of Retirement," CESifo Working Paper Series 412, CESifo Group Munich.
  4. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  5. Friedman, Benjamin M & Warshawsky, Mark J, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 135-54, February.
  6. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
  7. James M. Poterba, 1997. "The History of Annuities in the United States," NBER Working Papers 6001, National Bureau of Economic Research, Inc.
  8. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  9. Abel, Andrew B, 1986. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," Econometrica, Econometric Society, vol. 54(5), pages 1079-97, September.
  10. Peter Townley & Robin Boadway, 1986. "Social Security and the Failure of Annuity Markets," Working Papers 652, Queen's University, Department of Economics.
  11. Amy Finkelstein & James Poterba, 2002. "Selection Effects in the United Kingdom Individual Annuities Market," Economic Journal, Royal Economic Society, vol. 112(476), pages 28-50, January.
  12. Walliser, Jan, 2000. " Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 373-93, June.
  13. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
  14. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
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Cited by:
  1. Friedrich Schneider & Alexander F. Wagner & Mathias Dufour, 2003. "Satisfaction not guaranteed-Institutions and satisfaction with democracy in Western Europe," Economics working papers 2003-03, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Susanne Pech, 2004. "Adverse Selection with individual- and joint-life annuities," Economics working papers 2004-12, Department of Economics, Johannes Kepler University Linz, Austria.
  3. Susanne Pech, 2004. "Portfolio decisions on life annuities and financial assets with longevity and income uncertainty," Economics working papers 2004-14, Department of Economics, Johannes Kepler University Linz, Austria.
  4. Friedrich Schneider & Kausik Chaudhuri & Sumana Chatterjee, 2003. "The Size and Development of the Indian Shadow Economy and a Comparison with other 18 Asian Countries: An Empirical Investigation," Economics working papers 2003-02, Department of Economics, Johannes Kepler University Linz, Austria.
  5. Susanne Pech, 2004. "Tax Incentives for Private Life Annuities and the Social Security Reform: Effects on Consumption and on Adverse Selection," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 556-, December.
  6. Friedrich Schneider & Alexander F. Wagner, 2003. "Tradeable permits - Ten key design issues," Economics working papers 2003-04, Department of Economics, Johannes Kepler University Linz, Austria.

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