Premium
Asymmetric Information and Annuities
Author(s) -
PLATONI SILVIA
Publication year - 2010
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2010.01462.x
Subject(s) - economics , adverse selection , inefficiency , pareto principle , pooling , microeconomics , externality , moral hazard , economic interventionism , annuity , market failure , information asymmetry , actuarial science , incentive , life annuity , operations management , finance , pension , artificial intelligence , politics , computer science , political science , law
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.