Refundable Annuities (Annuity Options)
Individuals can insure themselves perfectly against uncertainty about the length of life by purchasing deferred annuities early in life. In the absence of other uninsurable uncertainties (e.g. income), there will be no residual purchases or sales of annuities later in life, thereby avoiding any adverse-selection. In contrast, the presence of such uncertainties creates an active residual annuity market based on the arrival of new information. We characterize the equilibrium in the residual annuity market and propose a new financial instrument, refundable annuities with a guaranteed refund price, which enables individuals who hold a portfolio of such annuities to better adjust their optimum consumption plan to different realizations. Refundable annuities are shown to be equivalent to annuity options, that is, options that, if exercised, enable the purchase of annuities later in life at a predetermined price. Holding a variety of refundable annuities is (ex-ante) welfare enhancing.
|Date of creation:||Sep 2007|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
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- Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
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- Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
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- Shlomo Benartzi & Richard Thaler, 2004. "Save more tomorrow: Using behavioral economics to increase employee saving," Natural Field Experiments 00337, The Field Experiments Website.
- Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, number 8536.
- David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.