Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization
Ben J. Heijdra
University of Groningen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for Advanced Studies (IHS)
Laurie S.M. Reijnders
University of Groningen
March 1, 2012
Netspar Discussion Paper No. 03/2012-008
We study the effects on the macroeconomic equilibrium, the wealth distribution, and welfare of adverse selection in private annuity markets in a closed economy inhabited by overlapping generations of heterogeneous agents who are distinguished by their health status. If an agent’s health type is private information there will be a pooling equilibrium in the private annuity market. We also study the implications for the macro-economy and welfare of a social security system with mandatory contributions that are constant across health types. These social annuities are immune to adverse selection and therefore offer a higher rate of return than private annuities do. However, they have a negative effect on the steady-state capital intensity and welfare. The positive effect of a fair pooled rate of return on a fixed part of savings and a higher return on capital in equilibrium is outweighed by the negative consequences of increased adverse selection in the private annuity market and a lower wage rate.
Number of Pages in PDF File: 32
Keywords: Annuity markets, adverse selection, overlapping generations, demography
JEL Classification: D52, D91, E10, J10working papers series
Date posted: April 17, 2012
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