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Asymmetric Information and Annuities

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  • SILVIA PLATONI

Abstract

The standard Rothschild and Stiglitz (1976) and Wilson (1977) analysis of adverse selection economies is extended to a particular model of annuity market which features both elements of moral hazard and adverse selection. Individuals are heterogeneous with respect to time preferences and they make investments in health care that affect their survival probabilities. The main case considered is that where both preferences and investments (and hence the endogenous survival probabilities) are unobserved. Thus, the model captures a further source of inefficiency that is particular to annuity market: an endogenous correlation between the desire for annuities and the survival probabilities. The basic insights of Wilson (1977) -as worked out by Eckstein, Eichenbaum and Peled (1985) -are worth also in this new setting. When the equilibrium is separating, the government intervention may yield Pareto improvements. If the equilibrium is pooling, the government intervention may improve the well-being of individuals affected by the inefficiencies and the negative externalities caused by the asymmetric information. Copyright © 2010 Wiley Periodicals, Inc..

Suggested Citation

  • Silvia Platoni, 2010. "Asymmetric Information and Annuities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(3), pages 501-532, June.
  • Handle: RePEc:bla:jpbect:v:12:y:2010:i:3:p:501-532
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    1. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
    2. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 551-573, June.
    3. Davies, James B. & Kuhn, Peter, 1992. "Social security, longevity, and moral hazard," Journal of Public Economics, Elsevier, vol. 49(1), pages 91-106, October.
    4. Epple, Dennis & Romano, Richard E, 1996. "Public Provision of Private Goods," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 57-84, February.
    5. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
    6. Anderberg, Dan, 1999. "Determining the mix of public and private provision of insurance by majority rule," European Journal of Political Economy, Elsevier, vol. 15(3), pages 417-440, September.
    7. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
    8. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
    9. Miguel Gouveia, 1997. "Majority rule and the public provision of a private good," Public Choice, Springer, vol. 93(3), pages 221-244, December.
    10. 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.
    11. Amy Finkelstein, 2002. "When Can Partial Public Insurance Produce Pareto Improvements?," NBER Working Papers 9035, National Bureau of Economic Research, Inc.
    12. Riley, John G, 1979. "Noncooperative Equilibrium and Market Signalling," American Economic Review, American Economic Association, vol. 69(2), pages 303-307, May.
    13. Mark V. Pauly, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 44-62.
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    Cited by:

    1. Silvia Platoni & Francesco Timpano, 2013. "Redistribution and Tax Evasion: an Asymmetric Information Approach," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1394, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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