Two essays on adverse selection in annuity markets
We study a closed economy featuring endogenous growth and overlapping generations of finitely-lived agents. Individuals differ in their health type and thereby their mortality profile.We show that if health status is private information then a pooling equilibrium emerges in the annuity market. Healthy agents receive a better than actuarially fair return while the unhealthy individuals get less than they are entitled to. This gives an incentive to unhealthy agents to borrow money in the last stages of their life. However, they will instead impose a voluntary borrowing constraint on themselves in order not to reveal their health status. For aplausibly parameterized version of the model the welfare loss of having a pooling equilibrium instead of a fair separating equilibrium is small, while the welfare gain relative to the total absence of annuities is much larger.