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Differentiated Annuities in a Pooling Equilibrium

Eytan Sheshinski ()

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: Regular annuities provide payment for the duration of an owner's lifetime. Period-Certain annuities provide additional payment after death to a beneficiary provided the insured dies within a certain period after annuitization. It has been argued that the bequest option offered by the latter is dominated by life insurance which provides non-random bequests. This is correct if competitive annuity and life insurance markets have full information about individual longevities. In contrast, this paper shows that when individual longevities are private information, a competitive pooling equilibrium which offers annuities at common prices to all individuals may have positive amounts of both types of annuities in addition to life insurance. In this equilibrium, individuals self-select the types of annuities that they purchase according to their longevity prospects. The break-even price of each type of annuity reflects the average longevity of its buyers. The broad conclusion that emerges from this paper is that adverse-selection due to asymmetric information is reflected not only in the amounts of insurance purchased but, importantly, also in the choice of insurance products suitable for different individual characteristics. This con- clusion is supported by recent empirical work about the UK annuity market (Finkelstein and Poterba (2004)).

Keywords: Annuities; Period-Certain Annuities; Pooling Equilibrium (search for similar items in EconPapers)
JEL-codes: D11 D82 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2005-11, Revised 2006-08
New Economics Papers: this item is included in nep-ias and nep-mic
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Related works:
Working Paper: Differentiated Annuities in a Pooling Equilibrium (2007) Downloads
Working Paper: Differentiated Annuities in a Pooling Equilibrium (2006) Downloads
Working Paper: Differentiated Annuities in a Pooling Equilibrium (2006) Downloads
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