Refundable Annuities (Annuity Options)
Individuals can insure themselves perfectly against uncertainty about the length of life by purchasing deferred annuities early in life. In the absence of other uninsurable uncertainties (e.g., income), there will be no residual purchases or sales of annuities later in life, thereby avoiding any adverse-selection. In contrast, the presence of such uncertainties creates an active residual annuity market based on the arrival of new information. We characterize the equilibrium in the residual annuity market and propose a new financial instrument, refundable annuities with a guaranteed refund price, which enables individuals who hold a portfolio of such annuities to better adjust their optimum consumption plan to different realizations. Refundable annuities are shown to be equivalent to annuity options, that is, options that, if exercised, enable the purchase of annuities later in life at a predetermined price. Holding a variety of refundable annuities is (ex ante) welfare enhancing. Copyright © 2010 Wiley Periodicals, Inc..
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Volume (Year): 12 (2010)
Issue (Month): 1 (02)
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References listed on IDEAS
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.:
- Matthew Rabin., 1997.
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- Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
- Richard Thaler & Shlomo Benartzi, 2004. "Save more tomorrow: Using behavioral economics to increase employee saving," Natural Field Experiments 00337, The Field Experiments Website.
- David Laibson, 1997.
"Golden Eggs and Hyperbolic Discounting,"
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Oxford University Press, vol. 112(2), pages 443-478.
- Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, number 8536.
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