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Social Insurance with Incomplete Markets

Author

Listed:
  • Stephane Verani

    (Federal Reserve Board)

  • Pei Cheng Yu

    (University of New South Wales)

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.

Suggested Citation

  • Stephane Verani & Pei Cheng Yu, 2019. "Social Insurance with Incomplete Markets," 2019 Meeting Papers 1346, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1346
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