Adverse selection and the market for annuities

Oded Palmon, Avia Spivak

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

Adverse selection is often blamed for the malfunctioning of the annuities market. We simulate the impact of adverse selection on the consumption allocation of annuitants under alternative parameter values, and explore the resulting welfare implications. We show that, for most parameter values, the welfare losses associated with equilibriums that are subject to adverse selection correspond to a loss of wealth of around one percent in a first-best equilibrium. These losses are smaller than the corresponding losses associated with equilibriums with no access to an annuity market by an order of magnitude of ten. The existence of substitutes for annuities such as a bequest motive or a social security system intensifies the adverse selection but reduces its welfare impact.

Original languageEnglish
Pages (from-to)37-59
Number of pages23
JournalGENEVA Risk and Insurance Review
Volume32
Issue number1
DOIs
StatePublished - 1 Jun 2007

Keywords

  • Adverse selection
  • Annuities
  • Defined Benefits
  • Defined Contribution
  • Information
  • Insurance
  • Social Security reform

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