Optimal Mandates and The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market
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Optimal.pdf
Description
forthcoming paper
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1.74 MB
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Author(s)
Einav, Liran
Schrimpf, Paul Thomas
Finkelstein, Amy
Date Issued
May 2010
Journal
Econometrica
Publisher
Econometric Society
Citation
Einav, Liran, Amy Finkelstein, and Paul Schrimp. "Optimal Mandates and The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market", Econometrica, Vol. 78, No. 3 (May, 2010), 1031–1092.
Version
Author's final manuscript
Abstract
Much of the extensive empirical literature on insurance markets has
focused on whether adverse selection can be detected. Once detected, however, there
has been little attempt to quantify its welfare cost, or to assess whether and what
potential government interventions may reduce these costs. To do so, we develop a model of annuity contract choice and estimate it using data from the U.K. annuity market.
The model allows for private information about mortality risk as well as heterogeneity
in preferences over different contract options. We focus on the choice of length of
guarantee among individuals who are required to buy annuities. The results suggest
that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about $127 million per year, or about
2 percent of annuitized wealth. We also fi nd that by requiring that individuals choose
the longest guarantee period allowed, mandates could achieve the first-best allocation.
However, we estimate that other mandated guarantee lengths would have detrimental
e¤ects on welfare. Since determining the optimal mandate is empirically difficult, our
fi ndings suggest that achieving welfare gains through mandatory social insurance may
be harder in practice than simple theory may suggest.
Subjects
structural estimation
adverse selection
contract choice
annuities
MIT Department
Massachusetts Institute of Technology. Department of Economics
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DOI of Published Version
http://dx.doi.org/10.3982/ECTA7245
https://doi.org/10.3982/ECTA7245
