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Adverse Selection in the Annuity Market when Payoffs Vary over the Time of Retirement


  • Johann K. Brunner
  • Susanne Pech


This paper investigates the effect of adverse selection and price competition on the private annuity market in a model with two retirement periods. In this framework annuity companies can offer contracts with different payoffs over the periods of retirement. Varying the time structure of the payoffs affects annuity demand and welfare of individuals with low and high life expectancy in different ways. By this, annuity purchasers can be separated according to their survival probabilities. Our main finding is that a Nash-Cournot equilibrium may not exist; if one exists, it will be a separating equilibrium. On the other hand, even if a separating equilibrium does not exist, a Wilson pooling equilibrium exists.

Suggested Citation

  • Johann K. Brunner & Susanne Pech, 2001. "Adverse Selection in the Annuity Market when Payoffs Vary over the Time of Retirement," CESifo Working Paper Series 412, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_412

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    References listed on IDEAS

    1. 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 373-393, June.
    2. Abel, Andrew B, 1986. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," Econometrica, Econometric Society, vol. 54(5), pages 1079-1097, September.
    3. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
    4. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
    5. Amy Finkelstein & James Poterba, 1999. "Selection Effects in the Market for Individual Annuities: New Evidence from the United Kingdom," NBER Working Papers 7168, National Bureau of Economic Research, Inc.
    6. Townley, Peter G. C. & Boadway, Robin W., 1988. "Social security and the failure of annuity markets," Journal of Public Economics, Elsevier, vol. 35(1), pages 75-96, February.
    7. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
    8. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters,in: Pensions in the U.S. Economy, pages 53-84 National Bureau of Economic Research, Inc.
    9. Mark V. Pauly, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 44-62.
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    Cited by:

    1. Johann Brunner & Susanne Pech, 2008. "Optimum taxation of life annuities," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 30(2), pages 285-303, February.
    2. Susanne Pech, 2004. "Portfolio decisions on life annuities and financial assets with longevity and income uncertainty," Economics working papers 2004-14, Department of Economics, Johannes Kepler University Linz, Austria.
    3. Johann K. Brunner & Susanne Pech, 2006. "Adverse selection in the annuity market with sequential and simultaneous insurance demand," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 31(2), pages 111-146, December.
    4. Susanne Pech, 2004. "Adverse Selection with individual- and joint-life annuities," Economics working papers 2004-12, Department of Economics, Johannes Kepler University Linz, Austria.
    5. Direr, A., 2010. "The taxation of life annuities under adverse selection," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 50-58, February.
    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. Susanne Pech, 2004. "Tax Incentives for Private Life Annuities and the Social Security Reform: Effects on Consumption and on Adverse Selection," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 556-556, December.
    8. Johann K. Brunner & Susanne Pech, 2005. "Adverse Selection in the Annuity Market When Profits Vary over the Time of Retirement," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 155-155, March.
    9. Johann K. Brunner & Susanne Pech, 2001. "Die Dritte Säule der Altersvorsorge," Economics working papers 2001-09, Department of Economics, Johannes Kepler University Linz, Austria.

    More about this item


    Annuity markets; adverse selection; uncertain lifetimes; pooling equilibrium; separating equilibrium;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies


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