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Capital Accumulation and Annuities in an Adverse Selection Economy

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  • Martin S. Eichenbaum
  • Dan S. Peled

Abstract

This paper suggests that adverse selection problems in competitive annuity markets can generate quantity constrained equilibria in which some agents whose length of lifetime is uncertain find it advantageous to accumulate capital privately. This occurs despite the higher rates of return on annuities. The welfare properties of these allocations are analyzed. It is shown that the level of capital accumulation is excessive in a Paretian sense. Policies which eliminate this inefficiency are discussed.

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File URL: http://www.nber.org/papers/w2046.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2046.

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Date of creation: Oct 1986
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Publication status: published as Eichenbaum, Martin S. and Dan S. Peled. "Capital Accumulation and Annuitiesin an Adverse Selection Economy," Journal of Political Economy, Vol. 95, No. 2, April 1987, pp. 334-354.
Handle: RePEc:nbr:nberwo:2046

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  1. Mervyn A. King & Louis Dicks-Mireaux, 1981. "Asset Holdings and the Life Cycle," NBER Working Papers 0614, National Bureau of Economic Research, Inc.
  2. E. Sheshinski & Y. Wiess, 1978. "Uncertainty and Optimal Social Security Systems," Working papers 225, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Laurence J. Kotlikoff & Avia Spivak, 1979. "The Family as an Incomplete Annuities Market," NBER Working Papers 0362, National Bureau of Economic Research, Inc.
  4. Eckstein, Zvi & Eichenbaum, Martin S & Peled, Dan, 1985. "The Distribution of Wealth and Welfare in the Presence of Incomplete Annuity Markets," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 789-806, August.
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  6. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
  7. B. Douglas Bernheim, 1987. "Dissaving After Retirement: Testing the Pure Life Cycle Hypothesis," NBER Working Papers 1409, National Bureau of Economic Research, Inc.
  8. King, M A & Dicks-Mireaux, L-D L, 1982. "Asset Holdings and the Life-Cycle," Economic Journal, Royal Economic Society, vol. 92(366), pages 247-67, June.
  9. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-91, September.
  10. Barro, Robert J. & Friedman, James W., 1977. "On Uncertain Lifetimes," Scholarly Articles 3451301, Harvard University Department of Economics.
  11. 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.
  12. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  13. B. Douglas Bernheim & Andrei Shleifer & Lawrence H. Summers, 1986. "Bequests as a Means of Payment," NBER Working Papers 1303, National Bureau of Economic Research, Inc.
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