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Nonexclusivity, Linear Pricing, and Annuity Market Screening
Author(s) -
Rothschild Casey
Publication year - 2015
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12019
Subject(s) - indemnity , annuity , actuarial science , adverse selection , payment , incentive compatibility , economics , incentive , insurance policy , business , life annuity , microeconomics , finance , pension
A BSTRACT I develop a graphical approach for studying two‐type adverse‐selection insurance markets with (1) compulsory contracting, (2) linear pricing, (3) nonexclusive contracting, and (4) multiple indemnity states. The UK compulsory annuity market is a natural application. Despite fully linear pricing and nonexclusivity, screening of different types into distinct contracts—using the pattern of insurance payments across distinct indemnity states rather than quantity restrictions—is possible. Efficient screening involves distorting both types’ contracts away from first best contracts, for example, via front‐loaded annuities. These distortions are attributable to convexification constraints that I identify as the nonexclusive, linear‐pricing analog of canonical incentive compatibility constraints.