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Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization

  • Ben Heijdra

    ()

  • Laurie Reijnders

    ()

We study the effects on the macroeconomic equilibrium, the wealth distribution, and welfare of adverse selection in private annuity markets in a closed economy inhabited by overlapping generations of heterogeneous agents who are distinguished by their health status. If an agent’s health type is private information there will be a pooling equilibrium in the private annuity market. We also study the implications for the macro-economy and welfare of a social security system with mandatory contributions that are constant across health types. These social annuities are immune to adverse selection and therefore offer a higher rate of return than private annuities do. However, they have a negative effect on the steady-state capital intensity and welfare. The positive effect of a fair pooled rate of return on a fixed part of savings and a higher return on capital in equilibrium is outweighed by the negative consequences of increased adverse selection in the private annuity market and a lower wage rate. Copyright The Author(s) 2012

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File URL: http://hdl.handle.net/10.1007/s10645-012-9191-z
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Article provided by Springer in its journal De Economist.

Volume (Year): 160 (2012)
Issue (Month): 3 (September)
Pages: 311-337

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Handle: RePEc:kap:decono:v:160:y:2012:i:3:p:311-337
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  1. Ben J. Heijdra & Laurie S. M. Reijnders, 2009. "Economic Growth and Longevity Risk with Adverse Selection," CESifo Working Paper Series 2898, CESifo Group Munich.
  2. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
  3. Villeneuve, Bertrand, 2003. "Mandatory pensions and the intensity of adverse selection in life insurance markets," Economics Papers from University Paris Dauphine 123456789/5363, Paris Dauphine University.
  4. Pecchenino, Rowena A & Pollard, Patricia S, 1997. "The Effects of Annuities, Bequests, and Aging in an Overlapping Generations Model of Endogenous Growth," Economic Journal, Royal Economic Society, vol. 107(440), pages 26-46, January.
  5. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  6. Heijdra, Ben J. & Mierau, Jochen O. & Reijnders, Laurie S.M., 2011. "The Tragedy of Annuitization," Economics Series 268, Institute for Advanced Studies.
  7. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
  8. Heijdra, Ben J. & Mierau, Jochen O., 2012. "The individual life-cycle, annuity market imperfections and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 876-890.
  9. 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.
  10. Walliser, Jan, 2000. " Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 373-93, June.
  11. Cannon, Edmund & Tonks, Ian, 2008. "Annuity Markets," OUP Catalogue, Oxford University Press, number 9780199216994, March.
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