Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization

Ben Heijdra () and Laurie Reijnders ()

De Economist, 2012, vol. 160, issue 3, 337 pages

Abstract: We study the effects on the macroeconomic equilibrium, the wealth distribution, and welfare of adverse selection in private annuity markets in a closed economy inhabited by overlapping generations of heterogeneous agents who are distinguished by their health status. If an agent’s health type is private information there will be a pooling equilibrium in the private annuity market. We also study the implications for the macro-economy and welfare of a social security system with mandatory contributions that are constant across health types. These social annuities are immune to adverse selection and therefore offer a higher rate of return than private annuities do. However, they have a negative effect on the steady-state capital intensity and welfare. The positive effect of a fair pooled rate of return on a fixed part of savings and a higher return on capital in equilibrium is outweighed by the negative consequences of increased adverse selection in the private annuity market and a lower wage rate. Copyright The Author(s) 2012

Keywords: Annuity markets; Adverse selection; Overlapping generations; Demography; D52; D91; E10; J10 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s10645-012-9191-z

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