Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security
The observation that few Americans purchase life annuities has often been attributed to adverse selection. A still unanswered question is whether observable price increases caused by adverse selection can be generated endogenously in a life cycle model. This paper calibrates a pure life cycle model for a characteristic US cohort and reproduces three stylized facts. Adverse selection increases annuity prices by 7-10 percent; the cost of adverse selection rises with the age of the annuitant; and the cost is smaller for females than for males. Social security privatization could reduce annuity prices by between 2 and 3 percent. Copyright 2000 by The editors of the Scandinavian Journal of Economics.
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Volume (Year): 102 (2000)
Issue (Month): 3 (June)
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