Welfare gains from illiquid annuities

  • Johanna Etner Johanna Etner

In this article, we challenge the common thought that a liquidannuity contract is optimal. We indeed show, in a standard neoclassical framework, that another contract, which actually resembles much more to the contracts that are proposed by most insurance companies, may be preferred by rational individuals. According to this contract, the annuities are an illiquid asset and the premium is age independent. In an overlapping-generation economy, we show that liquid annuities are preferred only if the equilibrium is dynamically inefficient. Alternatively, an equilibrium displaying a positive demand for illiquid annuities is efficient. We conclude by showing how to implement an illiquid annuities market in an efficient economy.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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