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Capital Accumulation and Annuities in an Adverse Selection Economy

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  • Eichenbaum, Martin S
  • Peled, Dan

Abstract

This paper suggests that adverse selection problems in competitive annuity markets can generate quantity-constrained equilibria in which some agents, whose length of lifetime is uncertain, find it advantageous to accumulate capital privately. This occurs despite the higher rates of return on annuities. The welfare properties of these allocations are analyzed. It is shown that the level of capital accumulation is excessive in a Paretian sense. Policies that eliminate this inefficiency are discussed. Copyright 1987 by University of Chicago Press.

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  • 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 334-354, April.
  • Handle: RePEc:ucp:jpolec:v:95:y:1987:i:2:p:334-54
    DOI: 10.1086/261458
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    1. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-391, April.
    2. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
    3. B. Douglas Bernheim, 1987. "Dissaving after Retirement: Testing the Pure Life Cycle Hypothesis," NBER Chapters, in: Issues in Pension Economics, pages 237-280, National Bureau of Economic Research, Inc.
    4. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    5. Eytan Sheshinski & Yoram Weiss, 1981. "Uncertainty and Optimal Social Security Systems," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 189-206.
    6. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
    7. Mervyn A. King & Louis Dicks-Mireaux, 1981. "Asset Holdings and the Life Cycle," NBER Working Papers 0614, National Bureau of Economic Research, Inc.
    8. Barro, Robert J & Friedman, James W, 1977. "On Uncertain Lifetimes," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 843-849, August.
    9. Zvi Eckstein & Martin S. Eichenbaum & Dan Peled, 1985. "The Distribution of Wealth and Welfare in the Presence of Incomplete Annuity Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 100(3), pages 789-806.
    10. B. Douglas Bernheim & Andrei Shleifer & Lawrence H. Summers, 1984. "Bequests as a Means of Payment," NBER Working Papers 1303, National Bureau of Economic Research, Inc.
    11. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-791, September.
    12. King, M A & Dicks-Mireaux, L-D L, 1982. "Asset Holdings and the Life-Cycle," Economic Journal, Royal Economic Society, vol. 92(366), pages 247-267, June.
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    Cited by:

    1. Cagetti, Marco & De Nardi, Mariacristina, 2008. "Wealth Inequality: Data And Models," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S2), pages 285-313, September.
    2. Thomas Url, 2014. "Vorteile der Risikoübernahme in der klassischen Lebensversicherung," WIFO Studies, WIFO, number 60603, June.
    3. Ben Heijdra & Laurie Reijnders, 2013. "Economic Growth and Longevity Risk with Adverse Selection," De Economist, Springer, vol. 161(1), pages 69-97, March.
    4. Mariacristina De Nardi, 2015. "Quantitative Models of Wealth Inequality: A Survey," NBER Working Papers 21106, National Bureau of Economic Research, Inc.
    5. repec:dau:papers:123456789/5369 is not listed on IDEAS
    6. Finkelstein, Amy & Poterba, James & Rothschild, Casey, 2009. "Redistribution by insurance market regulation: Analyzing a ban on gender-based retirement annuities," Journal of Financial Economics, Elsevier, vol. 91(1), pages 38-58, January.
    7. Ben J. Heijdra & Jochen O. Mierau, 2009. "Annuity Market Imperfection, Retirement and Economic Growth," CESifo Working Paper Series 2717, CESifo.
    8. Pashchenko, Svetlana, 2013. "Accounting for non-annuitization," Journal of Public Economics, Elsevier, vol. 98(C), pages 53-67.
    9. Steinorth, Petra, 2012. "The demand for enhanced annuities," Journal of Public Economics, Elsevier, vol. 96(11), pages 973-980.
    10. Dan Anderberg, 1999. "Adverse selection, competition, and linear self-insurance," Finnish Economic Papers, Finnish Economic Association, vol. 12(1), pages 3-15, Spring.
    11. Amy Finkelstein, 2002. "When Can Partial Public Insurance Produce Pareto Improvements?," NBER Working Papers 9035, National Bureau of Economic Research, Inc.
    12. Oliver Fabel, 1995. "Disability insurance in an optimal pension scheme," Journal of Economics, Springer, vol. 62(2), pages 157-183, June.
    13. Schuhmacher, Petra, 2008. "The Demand for Enhanced Annuities," Discussion Papers in Business Administration 7954, University of Munich, Munich School of Management.
    14. Mariacristina De Nardi & Giulio Fella, 2017. "Saving and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 280-300, October.
    15. Hugo Benitez-Silva, 2000. "A Dynamic Model of Labor Supply, Consumption/Saving, and Annuity Decisions under Uncertainty," Department of Economics Working Papers 00-06, Stony Brook University, Department of Economics.
    16. Toan Phan, 2016. "Information, Insurance and the Sustainability of Sovereign Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 93-108, October.
    17. 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.
    18. Hugo Benitez-Silva, 2000. "A Joint Model of Labor Supply and Consumption Decisions Under Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0196, Econometric Society.
    19. Roozbeh Hosseini, 2015. "Adverse Selection in the Annuity Market and the Role for Social Security," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 941-984.
    20. Hugo Benítez-Silva, 2003. "The Annuity Puzzle Revisited," Working Papers wp055, University of Michigan, Michigan Retirement Research Center.
    21. Oded Palmon & Avia Spivak, 2007. "Adverse selection and the market for annuities," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 37-59, June.

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