Economic Growth and Longevity Risk with Adverse Selection

Abstract

We study adverse selection on annuity markets in a general-equilibrium model of the closed economy. Agents differ in their health type and invest their assets on the annuity market. Without informational asymmetries themodel features a separating equilibrium in which each agent obtains an actuarially fair insurance. If the individual health types are unobservable to the annuity firms there exists a pooling equilibrium in which all agents annuitize at a common pooling rate. At this common rate unhealthy agents would eventually like to borrow but this would reveal their true health type. As a consequence, they face a self-imposed borrowing constraint. Surprisingly, the welfare and growth effects of the informational asymmetries are small..