Survival Ambiguity and Welfare

41 Pages Posted: 11 Aug 2017 Last revised: 12 Feb 2021

See all articles by Frank Caliendo

Frank Caliendo

Utah State University

Aspen Gorry

John E. Walker Department of Economics

Sita Slavov

George Mason University - School of Policy, Government, and International Affairs

Date Written: August 2017

Abstract

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.

Suggested Citation

Caliendo, Frank and Gorry, Aspen and Slavov, Sita, Survival Ambiguity and Welfare (August 2017). NBER Working Paper No. w23648, Available at SSRN: https://ssrn.com/abstract=3016918

Frank Caliendo (Contact Author)

Utah State University ( email )

Logan, UT 84322
United States

Aspen Gorry

John E. Walker Department of Economics ( email )

228 Sirrine Hall
Clemson, SC 29634
United States

Sita Slavov

George Mason University - School of Policy, Government, and International Affairs ( email )

Founders Hall
3351 Fairfax Dr.
Arlington, VA 22201
United States

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