Adverse Selection in the Chilean Annuity Market
30 Pages Posted: 17 Jul 2019 Last revised: 14 Jan 2020
Date Written: October 1, 2019
Asymmetric information about retirees’ longevity prospects can generate adverse selection in an annuity market. Longer lived individuals would be attracted to annuities and, in particular, to back-loaded ones. We analyze these two margins, using administrative data for the entire Chilean annuity market. We find consistent and sizeable evidence of adverse selection: individuals who choose to annuitize live 2 years more than those who do not. Among annuitants, similar effects (in the opposite direction) are found for the choice of a guaranteed period and front-loaded benefits. Despite the presence of adverse selection, usually associated with market unraveling, around 70% of women and 60% of men choose to annuitize.
Keywords: Adverse selection, annuities, guaranteed period, Chilean pension system
JEL Classification: G14, G22, G23, J32, J64
Suggested Citation: Suggested Citation