Research Papers
Abstract: This paper studies the role of social security in providing annuity insurance. I calculate the welfare cost of adverse selection in the annuity market using a life cycle model in which individuals have private information about their mortality. I calibrate the model to the current US social security replacement ratio, fraction of annuitized wealth and mortality heterogeneity in the Health and Retirement Study. My findings are the following: One, in the absence of social security, individuals (on average) maintain about the same fraction of annuitized wealth as they do in the presence of social security, despite the fact that prices in the market are actuarially unfair. As the result, the welfare loss of abolishing social security is only 0.15 percent (in terms of consumption). Two, there is an ex-ante gain of 0.51 percent from implementing the ex-ante efficient allocations which comes from redistributing resources from high mortality types to low mortality types. Individuals with high mortality (who will die soon and do not have demand for longevity insurance) incur large welfare losses from mandatory participation. These losses offset the benefits of providing insurance to low mortality types, leaving the overall ex ante welfare gain small.
A Competitive Model of Annuity and Life Insurance with Nonexclusive Contracts -coming soon!
Abstract: I study a two period economy where altruistic consumers have uncertain lifetime and are privately informed about their survival probabilities. There are firms who sell linear non-exclusive Life insurance and annuity contracts. In this environment competitive equilibrium with life and annuity insurance exists despite the presence of adverse selection. This environment has three key features: 1) In any equilibrium there is at most one insurance market where trade occurs. 2) Increase in social security tax and benefits leads to increase in price of annuity and crowds out trade activities in annuity market (and a symmetric opposite effect in Life insurance market) . 3) In this environment ex-ante efficient allocations are independent of heterogeneous survival types and can be optimally implemented using simple tax-transfer instruments. Under optimal policy both annuity and life insurance markets are endogenously closed.
Work in Progress
Efficient Allocations with Limited Commitment (joint with Pricila Maziero)
Abstract: We study the social insurance problem in an environment where agents have private information about their taste shocks and the insurance provider (or government) cannot commit to the ex ante optimal allocation rules. With no commitment, the government is tempted to use updated beliefs about agents’ types and offer a new insurance plan each period. Given this lack of commitment, we allow the government to use a general communication mechanism (as opposed to direct communication). In this communication system, agents report their type to a mediator, and the mediator sends a (possibly random) signal of the types to the government. We show that in this setup the revelation principal holds and agents’ behavior can be summarized by a set of incentive compatibility constraints. This allows us to write the problem of finding the efficient allocation as a maximization problem subject to a set of incentive and feasibility constraints and a series of time consistency constraints. In general, the optimal allocation rules in environments with noisy communication (with mediator) might be different from the ones with direct communication. Every optimal allocation under direct communication can be implemented by a noisy communication system, however, the converse is not always true. We use this set up to investigate this issue and provide a simple example in which the optimal allocation is indeed different under both communication system.
Markov Perfect Equilibrium in an Old Age Security Model of Fertility Choice (joint with Larry Jones)