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Annuity Market Imperfection, Retirement and Economic Growth

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  • Ben J. Heijdra
  • Jochen O. Mierau

Abstract

We study the effects of an annuity market imperfection on individual agents’ labour supply and retirement decisions and on the macroeconomic growth rate in an overlapping generations model with endogenous growth. We model imperfect annuities by introducing a load factor on the interest rate faced by finitely-lived agents. Our core model features age-independent wages and a constant mortality rate. In the first extension we study the implications for microeconomic decisions and macroeconomic outcomes of a hump-shaped life-cycle profile in labour productivity, whilst in the second extension we postulate a realistic mortality process. Our main findings are that the limited availability of annuities induces agents to retire early in the first two models, but later in the model with age-dependent mortality. In all cases, the general equilibrium repercussion is that economic growth is lower under imperfect annuities than with perfect annuities.

Suggested Citation

  • Ben J. Heijdra & Jochen O. Mierau, 2009. "Annuity Market Imperfection, Retirement and Economic Growth," CESifo Working Paper Series 2717, CESifo.
  • Handle: RePEc:ces:ceswps:_2717
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. dʼAlbis, Hippolyte & Lau, Sau-Him Paul & Sánchez-Romero, Miguel, 2012. "Mortality transition and differential incentives for early retirement," Journal of Economic Theory, Elsevier, vol. 147(1), pages 261-283.
    2. repec:dau:papers:123456789/6825 is not listed on IDEAS
    3. Yu‐Fu Chen & Michael Funke, 2010. "Booms, Recessions And Financial Turmoil: A Fresh Look At Investment Decisions Under Cyclical Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(3), pages 290-317, July.
    4. Ben J. Heijdra & Laurie S. M. Reijnders, 2009. "Economic Growth and Longevity Risk with Adverse Selection," CESifo Working Paper Series 2898, CESifo.
    5. 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.
    6. 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.
    7. Ben Heijdra & Laurie Reijnders, 2013. "Economic Growth and Longevity Risk with Adverse Selection," De Economist, Springer, vol. 161(1), pages 69-97, March.

    More about this item

    Keywords

    annuity markets; retirement; endogenous growth; overlapping generations; demography;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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