Can Transparency Exacerbate Adverse Selection? Evidence from Annuity Markets

45 Pages Posted: 17 Jul 2019 Last revised: 24 Sep 2020

See all articles by Eduardo Fajnzylber

Eduardo Fajnzylber

Adolfo Ibanez University - Escuela de Gobierno

Manuel Willington

Facultad de Economía y Negocios - Universidad Del Desarrollo

Matias Pizarro

Instituto Nacional de Estadística (INE)

Date Written: May 1, 2019

Abstract

Upon retirement, Chilean workers must choose between two pension products: a longevity-insured life annuity or a programmed withdrawal. In the latter case, benefits tend to decrease over time but in the event of an early death the remaining balance is paid as survivorship benefits or inheritance. The retiree faces a trade-off between longevity insurance and greater inheritance. Comparing longevity outcomes of Chilean retirees, we show robust evidence of adverse selection: longevity is positively correlated with annuitization in general and, among annuitants, negatively correlated with choosing front-loaded contracts or contracts with guaranteed periods. Our results also show that the introduction in 2004 of an electronic annuity market –meant to increase transparency and competition– increased the level of adverse selection. Finally, in an attempt to disentangle the effects of adverse selection from moral hazard, we estimate instrumental variable binary choice models, finding negligible evidence of an insurance-induced behavioral change.

Keywords: Adverse selection, annuities, market transparency, Chilean pension system, moral hazard

JEL Classification: G14, G22, G23, J32, J64

Suggested Citation

Fajnzylber, Eduardo and Willington, Manuel and Pizarro, Matias, Can Transparency Exacerbate Adverse Selection? Evidence from Annuity Markets (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3402710 or http://dx.doi.org/10.2139/ssrn.3402710

Eduardo Fajnzylber

Adolfo Ibanez University - Escuela de Gobierno ( email )

Chile

Manuel Willington (Contact Author)

Facultad de Economía y Negocios - Universidad Del Desarrollo ( email )

Santiago, RM
Chile

Matias Pizarro

Instituto Nacional de Estadística (INE) ( email )

Paseo de la Castellana 183 6ta. Planta
Madrid, Madrid 28011
Spain

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