Is it really good to annuitize?

Feigenbaum, James, Gahramanov, Emin and Tang, Xueli 2013, Is it really good to annuitize?, Journal of economic behavior & organization, vol. 93, pp. 116-140, doi: 10.1016/j.jebo.2013.07.005.

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Title Is it really good to annuitize?
Author(s) Feigenbaum, James
Gahramanov, Emin
Tang, XueliORCID iD for Tang, Xueli
Journal name Journal of economic behavior & organization
Volume number 93
Start page 116
End page 140
Total pages 25
Publisher Elsevier BV
Place of publication Amsterdam, The Netherlands
Publication date 2013-09
ISSN 0167-2681
Keyword(s) consumption
general equilibrium
pecuniary externalities
annuities puzzle
mortality risk
overlapping generations
restricted optimal irrational behavior
golden rule
Summary Although rational consumers without bequest motives are better off investing exclusively with annuitized instruments in partial equilibrium, we demonstrate the welfare effect of annuitization is ambiguous in general equilibrium on account of pecuniary externalities. Absent institutional constraints like prices and budgets, the optimal consumption rule would have marginal utility increase at the preferential discount rate. In a rational competitive equilibrium where households fully annuitize, the growth rate of marginal utility will be the discount rate minus the interest rate, resulting in a consumption profile that is too flat. Accidental bequests transfer wealth from the old to the young, steepening the consumption profile and yielding a better equilibrium. If households are restricted to Keynesian consumption functions, the optimal irrational equilibrium with standard preferences can replicate observed consumption and macroeconomic behavior, and the equilibrium without annuities delivers higher utility than the equilibrium with annuities. Whereas preceding papers have merely hypothesized that households might engage in socially optimal, yet irrational behavior, the failure of households to annuitize is a real-world example of this. Policymakers should not take steps to encourage more annuitization by the public.
Language eng
DOI 10.1016/j.jebo.2013.07.005
Field of Research 140102 Macroeconomic Theory
Socio Economic Objective 910109 Savings and Investments
HERDC Research category C1 Refereed article in a scholarly journal
HERDC collection year 2013
Copyright notice ©2013, Elsevier
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