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Introduction to The Economic Theory of Annuities

In: The Economic Theory of Annuities

Author

Listed:
  • Eytan Sheshinski

    (Hebrew University)

Abstract

Annuities are financial products that guarantee the holder a fixed return so long as the holder remains alive, thereby providing insurance against lifetime uncertainty. The terms of these contracts depend on the information available to insurance firms. Unlike age and gender, information about individual survival probabilities cannot be readily ascertained. This asymmetric information causes market inefficiencies, such as adverse selection. Groundbreaking in its scope, The Economic Theory of Annuities offers readers a theoretical analysis of the functioning of private annuity markets. Starting with a general analysis of survival functions, stochastic dominance, and characterization of changes in longevity, Eytan Sheshinski derives the demand for annuities using a model of individuals who jointly choose their lifetime consumption and retirement age. The relation between life insurance and annuities that have a bequest option is examined and "annuity options" are proposed as a response to the lack of secondary markets. This book also investigates the macroeconomic policy implications of annuities and changes in longevity on aggregate savings. Sheshinski utilizes statistical population theory to shed light on the debate of whether the surge in savings and growth in Asia and other countries can be attributed to higher longevity of the population and whether this surge is durable. This book shows how understanding annuities becomes essential as governments that grapple with insolvency of public social security systems place greater emphasis on individual savings accounts.

Suggested Citation

  • Eytan Sheshinski, 2007. "Introduction to The Economic Theory of Annuities," Introductory Chapters,in: The Economic Theory of Annuities Princeton University Press.
  • Handle: RePEc:pup:chapts:8536-1
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    Citations

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    Cited by:

    1. Pang, Gaobo & Warshawsky, Mark, 2010. "Optimizing the equity-bond-annuity portfolio in retirement: The impact of uncertain health expenses," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 198-209, February.
    2. Marie-Louise Leroux & Gregory Ponthiere, 2009. "Optimal tax policy and expected longevity: a mean and variance utility approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(4), pages 514-537, August.
    3. Felix Reichling & Kent Smetters, 2013. "Optimal Annuitization with Stochastic Mortality Probabilities: Working Paper 2013-05," Working Papers 44374, Congressional Budget Office.
    4. repec:hrv:faseco:34330197 is not listed on IDEAS
    5. Giuseppe Cappelletti & Giovanni Guazzarotti & Pietro Tommasino, 2011. "What determines annuity demand at retirement?," Temi di discussione (Economic working papers) 805, Bank of Italy, Economic Research and International Relations Area.
    6. Felix Reichling & Kent Smetters, 2013. "Optimal Annuitization with Stochastic Mortality Probabilities," NBER Working Papers 19211, National Bureau of Economic Research, Inc.
    7. Felix Reichling & Kent Smetters, 2015. "Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs," American Economic Review, American Economic Association, vol. 105(11), pages 3273-3320, November.
    8. Zvi Bodie & Jérôme Detemple & Marcel Rindisbacher, 2009. "Life-Cycle Finance and the Design of Pension Plans," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 249-286, November.
    9. Sheshinski, Eytan, 2000. "Optimal Policy to Influence Individual Choice Probabilities," MPRA Paper 55490, University Library of Munich, Germany, revised Dec 2002.
    10. Wong, Chi Heem & Tsui, Albert K., 2015. "Forecasting life expectancy: Evidence from a new survival function," Insurance: Mathematics and Economics, Elsevier, vol. 65(C), pages 208-226.
    11. Dávila, Julio & Leroux, Marie-Louise, 2015. "Efficiency in overlapping generations economies with longevity choices and fair annuities," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 363-383.

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