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The individual life-cycle, annuity market imperfections and economic growth

  • Heijdra, Ben J.
  • Mierau, Jochen O.

We study the effects of an annuity market imperfection on individual agents' life-cycle decisions and on the macroeconomic growth rate in an overlapping generations model with single-sector endogenous growth. Our model features both age-dependent mortality and labour productivity. We model imperfect annuities by introducing a load factor on the annuity rate faced by finitely lived agents. Our main finding is that annuity market imperfections decrease economic growth because less assets are necessary for consumption late in life. In addition we find that both the quantitative and qualitative effects of annuity market imperfections are grossly overestimated in a partial equilibrium analysis because it disregards general equilibrium repercussions.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 6 ()
Pages: 876-890

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:6:p:876-890
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  1. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters, in: Pensions in the U.S. Economy, pages 53-84 National Bureau of Economic Research, Inc.
  2. Ben J. Heijdra & Ward E. Romp, 2008. "A life-cycle overlapping-generations model of the small open economy," Oxford Economic Papers, Oxford University Press, vol. 60(1), pages 88-121, January.
  3. Boucekkine, Raouf & de la Croix, David & Licandro, Omar, 2000. "Vintage Human Capital, Demographic Trends and Endogenous Growth," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000007, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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  9. Gary Hansen & Selahattin Imrohoroglu, 2008. "Consumption over the Life Cycle: The Role of Annuities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 566-583, July.
  10. Jingjing Chai & Wolfram Horneff & Raimond Maurer & Olivia S. Mitchell, 2011. "Optimal Portfolio Choice over the Life Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts," Review of Finance, European Finance Association, vol. 15(4), pages 875-907.
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  12. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1243-1259.
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  14. Horneff, Wolfram J. & Maurer, Raimond H. & Stamos, Michael Z., 2008. "Life-cycle asset allocation with annuity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3590-3612, November.
  15. Jesus Fernández-Villaverde & Dirk Krueger, 2007. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 552-565, August.
  16. Ben Heijdra & Jochen Mierau, 2011. "The Individual Life Cycle and Economic Growth: An Essay on Demographic Macroeconomics," De Economist, Springer, vol. 159(1), pages 63-87, March.
  17. Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc.
  18. Heijdra, Ben J. & Mierau, Jochen O., 2010. "Growth Effects Of Consumption And Labor-Income Taxation In An Overlapping-Generations Life-Cycle Model," Macroeconomic Dynamics, Cambridge University Press, vol. 14(S2), pages 151-175, November.
  19. Ben J. Heijdra & Jochen O. Mierau, 2009. "Annuity Market Imperfection, Retirement and Economic Growth," CESifo Working Paper Series 2717, CESifo Group Munich.
  20. Ellen R. McGrattan & Richard Rogerson, 2004. "Changes in hours worked, 1950?2000," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 14-33.
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