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Economic Growth and Longevity Risk with Adverse Selection

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  • Ben Heijdra
  • Laurie Reijnders

Abstract

We study the implications of adverse selection in annuity markets in a general-equilibrium model of the closed economy. Agents differ in their health type and invest their assets in the annuity market. Without informational asymmetries each agent would obtain an actuarially fair insurance. If the individual health types and total annuity purchases are unobservable to the annuity firms then there exists a pooling equilibrium in which all agents annuitize at a common rate. At this pooling rate unhealthy agents would eventually like to borrow but this would reveal their true health type. As a consequence, they rationally drop out of the market. Surprisingly, the welfare and growth effects of the informational asymmetries are rather small. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Ben Heijdra & Laurie Reijnders, 2013. "Economic Growth and Longevity Risk with Adverse Selection," De Economist, Springer, vol. 161(1), pages 69-97, March.
    • Handle: RePEc:kap:decono:v:161:y:2013:i:1:p:69-97
    DOI: 10.1007/s10645-012-9199-4
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    Cited by:

    1. Ben Heijdra & Laurie Reijnders, 2012. "Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization," De Economist, Springer, vol. 160(3), pages 311-337, September.
    2. Shuyun May Li, Solmaz Moslehi, Siew Ling Yew, 2012. "Public-Private Mix of Health Expenditure: A Political Economy Approach and A Quantitative Exercise," Department of Economics - Working Papers Series 1157, The University of Melbourne.
    3. Ben Heijdra & Jochen Mierau, 2011. "The Individual Life Cycle and Economic Growth: An Essay on Demographic Macroeconomics," De Economist, Springer, vol. 159(1), pages 63-87, March.

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    More about this item

    Keywords

    Annuity markets; Adverse selection; Endogenous growth; Overlapping generations; Demography; D52; D91; E10; J10;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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