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Differentiated Annuities in a Pooling Equilibrium

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  • Eytan Sheshinski

Abstract

Regular annuities provide payment for the duration of an owner’s lifetime. Period-Certain annuities provide additional payment after death to a beneficiary provided the insured dies within a certain period after annuitization. It has been argued that the bequest option offered by the latter is dominated by life insurance which provides non-random bequests. This is correct if competitive annuity and life insurance markets have full information about individual longevities. In contrast, this paper shows that when individual longevities are private information, a competitive pooling equilibrium which offers annuities at common prices to all individuals may have positive amounts of both types of annuities in addition to life insurance. In this equilibrium, individuals self-select the types of annuities that they purchase according to their longevity prospects. The break-even price of each type of annuity reflects the average longevity of its buyers. The broad conclusion that emerges from this paper is that adverse-selection due to asymmetric information is reflected not only in the amounts of insurance purchased but, importantly, also in the choice of insurance products suitable for different individual characteristics. This conclusion is supported by recent empirical work about the UK annuity market (Finkelstein and Poterba (2004)).

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1844.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1844

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Keywords: annuities; period-certain annuities; pooling equilibrium;

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  1. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
  2. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  3. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
  4. 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.
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Cited by:
  1. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2007. "The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market," NBER Working Papers 13228, National Bureau of Economic Research, Inc.

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