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Survival ambiguity and welfare

Frank Caliendo (), Aspen Gorry and Sita Slavov

Journal of Economic Behavior & Organization, 2020, vol. 170, issue C, 20-42

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. Ambiguity neutral 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.

Keywords: Ambiguity; Longevity Risk; Survival; Annuities; Social Security (search for similar items in EconPapers)
JEL-codes: D80 D91 H55 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:170:y:2020:i:c:p:20-42

DOI: 10.1016/j.jebo.2019.11.011

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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