The Economic Theory of Annuities

Eytan Sheshinski

• Publisher: Princeton University Press
• Year: 2021
• Print ISBN:
  9780691133058
• eBook ISBN:
  9781400829422
• Topic: Economics
• Subtopic: Finance
• Index: Economics

Annuities are financial products that guarantee the holder a fixed return so long as the holder remains alive, thereby providing insurance against lifetime uncertainty. The terms of these contracts depend on the information available to insurance firms. Unlike age and gender, information about individual survival probabilities cannot be readily ascertained. This asymmetric information causes market inefficiencies, such as adverse selection.

Groundbreaking in its scope, The Economic Theory of Annuities offers readers a theoretical analysis of the functioning of private annuity markets. Starting with a general analysis of survival functions, stochastic dominance, and characterization of changes in longevity, Eytan Sheshinski derives the demand for annuities using a model of individuals who jointly choose their lifetime consumption and retirement age.

The relation between life insurance and annuities that have a bequest option is examined and "annuity options" are proposed as a response to the lack of secondary markets. This book also investigates the macroeconomic policy implications of annuities and changes in longevity on aggregate savings. Sheshinski utilizes statistical population theory to shed light on the debate of whether the surge in savings and growth in Asia and other countries can be attributed to higher longevity of the population and whether this surge is durable.

This book shows how understanding annuities becomes essential as governments that grapple with insolvency of public social security systems place greater emphasis on individual savings accounts.

Table of contents

• Cover Page
• Half-title Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Preface
• Chapter 1: Introduction
• Chapter 2: Benchmark Calculations: Savings and Retirement
• Chapter 3: Survival Functions, Stochastic Dominance, and Changes in Longevity
• Chapter 4: Life Cycle Model with Longevity Risk: First Best and Competitive Equilibrium
• Chapter 5: Comparative Statics, Discounting, Partial Annuitization, and No Annuities
• Chapter 6: Subjective Beliefs and Survival Probabilities
• Chapter 7: Moral Hazard
• Chapter 8: Uncertain Future Survival Functions
• Chapter 9: Pooling Equilibrium and Adverse Selection
• Chapter 10: Income Uncertainty
• Chapter 11: Life Insurance and Differentiated Annuities
• Chapter 12: Annuities, Longevity, and Aggregate Savings
• Chapter 13: Utilitarian Pricing of Annuities
• Chapter 14: Optimum Taxation in Pooling Equilibria
• Chapter 15: Bundling of Annuities and Other Insurance Products
• Chapter 16: Financial Innovation—Refundable Annuities (Annuity Options)
• References
• Index