Differentiated Annuities in a Pooling Equilibrium
AbstractRegular 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 con- clusion is supported by recent empirical work about the UK annuity market (Finkelstein and Poterba (2004)).
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Bibliographic InfoPaper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000474.
Date of creation: 07 Oct 2006
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Other versions of this item:
- Eytan Sheshinski, 2006. "Differentiated Annuities in a Pooling Equilibrium," CESifo Working Paper Series 1844, CESifo Group Munich.
- Eytan Sheshinski, 2005. "Differentiated Annuities in a Pooling Equilibrium," Discussion Paper Series dp433, The Center for the Study of Rationality, Hebrew University, Jerusalem, revised Aug 2006.
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-14 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005.
"Annuities and Individual Welfare,"
American Economic Review,
American Economic Association, vol. 95(5), pages 1573-1590, December.
- 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.
- Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
- Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
- 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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