Welfare gains from illiquid annuities

Mardi | 2011-06-07
B103 – 16h20

Hippolyte D’ALBIS

In this article, we challenge the common thought that the annuity contract proposed by Yaari in his seminal 1965’s paper is optimal. We indeed show, in a standard neo-classical framework, that another contract, which actually resembles much more to the contracts that are proposed in the  » real world » , 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 Yaari’s annuities are preferred only if the equilibrium is dynamically inefficient. Alternatively, an equilibrium displaying a positive demand for illiquid annuities is efficient. We conclude byshowing how to implement an illiquid annuities market in an efficient economy.