Capital Accumulation and Annuities in an Adverse Selection Economy
35 Pages Posted: 27 Apr 2000 Last revised: 4 Feb 2021
Date Written: October 1986
This paper suggests that adverse selection problems in competitive annuity markets can generate quantity constrained equilibria in which some agents whose length of lifetime is uncertain find it advantageous to accumulate capital privately. This occurs despite the higher rates of return on annuities. The welfare properties of these allocations are analyzed. It is shown that the level of capital accumulation is excessive in a Paretian sense. Policies which eliminate this inefficiency are discussed.
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