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The demand for enhanced annuities

  • Steinorth, Petra
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    This paper examines market reaction to the introduction of enhanced annuities in a market for deferred standard annuities. The previous literature shows that individuals can try to avoid risk classification by contracting a standard annuity earlier in their life. This paper offers a new perspective to the timing of the annuity purchase under the assumption that individuals already have an idea about their future risk type when young which becomes clearer over time. It shows that enhanced annuities can crowd out earlier standard annuities completely if the individuals have incomplete knowledge of their future risk type. However, if individuals are sufficiently risk averse and there is a sufficiently high proportion of low risks in the population, both products can remain in the market where lower risk types buy enhanced annuities while the higher risks stick to the early standard annuities. The paper identifies the equilibrium candidate with both annuity types to be Pareto-superior and the unique equilibrium.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0047272712000898
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    Article provided by Elsevier in its journal Journal of Public Economics.

    Volume (Year): 96 (2012)
    Issue (Month): 11 ()
    Pages: 973-980

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    Handle: RePEc:eee:pubeco:v:96:y:2012:i:11:p:973-980
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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    1. Eichenbaum, Martin S & Peled, Dan, 1987. "Capital Accumulation and Annuities in an Adverse Selection Economy," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 334-54, April.
    2. Friedman, Benjamin M & Warshawsky, Mark J, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 135-54, February.
    3. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    4. Oded Palmon & Avia Spivak, 2007. "Adverse selection and the market for annuities," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 37-59, June.
    5. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    6. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
    7. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
    8. Eytan Sheshinski, 2007. "Optimum and Risk-Class Pricing of Annuities," Economic Journal, Royal Economic Society, vol. 117(516), pages 240-251, 01.
    9. Mathias Kifmann, 2010. "The Design of Pension Pay Out Options When the Health Status during Retirement Is Uncertain," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 127-149, 02.
    10. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
    11. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
    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. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
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