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Survival Ambiguity and Welfare

Listed author(s):
  • Frank N. Caliendo
  • Aspen Gorry
  • Sita Slavov

Nearly all life-cycle models adopt Yaari's (1965) assumption that individuals know the survival probabilities that they face. Given that an individual's exact survival probabilities are likely unknown, we explore the implications of relaxing this assumption. If there is no annuity market, then the welfare cost of survival ambiguity is large and regressive. Individuals would pay as much as 1% of total lifetime consumption for immediate resolution of ambiguity and the bottom income quintile is 4 times worse off than the top quintile. Alternatively, with the availability of competitive annuity contracts, survival ambiguity is welfare improving because it allows competitive insurance companies to pool risk across survival types. Even though Social Security and annuities share some properties, Social Security does not help to hedge survival ambiguity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23648.

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Date of creation: Aug 2017
Handle: RePEc:nbr:nberwo:23648
Note: AG PE
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