Welfare Gains from Illiquid Annuities

24 Pages Posted: 7 Jun 2012 Last revised: 12 Jun 2012

See all articles by Hippolyte d'Albis

Hippolyte d'Albis

University of Toulouse 1 - Toulouse School of Economics (TSE)

Johanna Etner

Université Paris V Rene Descartes

Date Written: January 30, 2012

Abstract

In this article, we challenge the common thought that a liquid annuity contract is optimal. We indeed show, in a standard neoclassical framework, that another contract, which actually resembles much more to the contracts that are proposed by most insurance companies, may be preferred by rational individuals. According to this contract, the annuities are an illiquid asset and the premium is age independent. In an overlapping-generation economy, we show that liquid annuities are preferred only if the equilibrium is dynamically inefficient. Alternatively, an equilibrium displaying a positive demand for illiquid annuities is efficient. We conclude by showing how to implement an illiquid annuities market in an efficient economy.

Suggested Citation

d'Albis, Hippolyte and Etner, Johanna, Welfare Gains from Illiquid Annuities (January 30, 2012). Netspar Discussion Paper No. 06/2012-019, Available at SSRN: https://ssrn.com/abstract=2079488 or http://dx.doi.org/10.2139/ssrn.2079488

Hippolyte D'Albis (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Johanna Etner

Université Paris V Rene Descartes ( email )

31, avenue Bosquet
Paris, 75270
France

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