Social Insurance with Incomplete Markets

Stephane Verani and Pei Cheng Yu

No 1346, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We show that social and private insurance are complementary when corporate debt maturity structure is constrained in an economy subject to aggregate shocks. The unavailability of long duration debt securities requires life insurers to manage the risk associated with their long-term liability. The cost of risk management implies that annuities are priced above their actuarially fair price. The annuity markup means that poorer individuals are more reliant on tax-funded social insurance programs and wealthier individuals prefer to self-insure. By choosing both taxes and its debt maturity structure, a government alleviates frictions in private insurance markets and reduces the size of its social insurance program.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1346

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