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Auctioning Annuities

Author

Listed:
  • Gaurab Aryal

    (University of Virginia)

  • Eduardo Fajnzylber

    (Universidad Adolfo Ibáñez)

  • Maria F. Gabrielli

    (Universidad del Desarrollo/CONICET)

  • Manuel Willington

    (Universidad Adolfo Ibáñez)

Abstract

We use data on annuities to study and evaluate an imperfectly competitive market where firms have private information about their (annuitization) costs. Our data is from Chile, where the market is structured as first-price-auction-followed-by-bargaining, and where each retiree chooses a firm and an annuity contract to maximize her expected present discounted utility. We find that retirees with low savings have the highest in- formation processing cost, and they also care about firms' risk-ratings the most. Furthermore, while almost 50% of retirees reveal that they do not value leaving bequests, the rest have heterogeneous preference for bequest that, on average, increases with their savings. On the supply side, we find that firms' annuitization costs vary across retirees, and the average costs increase with retirees’ savings. If these costs were commonly known then the pensions would increase for everyone, but the increment would be substantial only for the high savers. Likewise, if we simplify the current pricing mechanism by implementing English auctions and "shutting down" the risk-ratings, then the pensions would increase, but again, mostly for the high savers.

Suggested Citation

  • Gaurab Aryal & Eduardo Fajnzylber & Maria F. Gabrielli & Manuel Willington, 2020. "Auctioning Annuities," Working Papers 29, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:29
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    Other versions of this item:

    • Gaurab Aryal & Eduardo Fajnzylber & Maria F. Gabrielli & Manuel Willington, 2020. "Auctioning Annuities," Papers 2011.02899, arXiv.org, revised Jun 2021.

    References listed on IDEAS

    as
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    3. Brown, Jeffrey R. & Mitchell, Olivia S. & Poterba, James M. & Warshawsky, Mark J., 2001. "The Role of Annuity Markets in Financing Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262529130, April.
    4. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(2), pages 137-150.
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    More about this item

    Keywords

    Annuity Auctions Mortality Annuitization Costs;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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