Asymmetric Information and Annuities

Research output: Contribution to journalArticlepeer-review

Abstract

The standard Rothschild and Stiglitz (1976) and Wilson (1977) analysis of adverse selection economies is extended to a particular model of annuity market which features both elements of moral hazard and adverse selection. Individuals are heterogeneous with respect to time preferences and they make investments in health care that affect their survival probabilities. The main case considered is that where both preferences and investments (and hence the endogenous survival probabilities) are unobserved. Thus the model captures a further source of inefficiency that is particular to annuity market: an endogenous correlation between the desire for annuities and the survival probabilities. The basic insights of Wilson (1977) - as worked out by Eckstein, Eichenbaum and Peled (1985) - are worth also in this new setting. When the equilibrium is separating, the government intervention may yield Pareto improvements. If the equilibrium is pooling, the government intervention may improve the well-being of individuals affected by the inefficiencies and the negative externalities caused by the asymmetric information.
Original languageEnglish
Pages (from-to)501-532
Number of pages32
JournalJournal of Public Economic Theory
Volume12
DOIs
Publication statusPublished - 2010

Keywords

  • Asymmetric Information

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