Survival Ambiguity and Welfare / Frank N. Caliendo, Aspen Gorry, Sita Slavov.

Format:

Book

Author/Creator:

Caliendo, Frank N.

Contributor:

National Bureau of Economic Research.

Gorry, Aspen.

Slavov, Sita.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23648.

NBER working paper series no. w23648

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

Nearly all life-cycle models adopt Yaari's (1965) assumption that individuals know the survival probabilities that they face. Given that an individual's exact survival probabilities are likely unknown, we explore the implications of relaxing this assumption. If there is no annuity market, then the welfare cost of survival ambiguity is large and regressive. Individuals would pay as much as 1% of total lifetime consumption for immediate resolution of ambiguity and the bottom income quintile is 4 times worse off than the top quintile. Alternatively, with the availability of competitive annuity contracts, survival ambiguity is welfare improving because it allows competitive insurance companies to pool risk across survival types. Even though Social Security and annuities share some properties, Social Security does not help to hedge survival ambiguity.

Notes:

Print version record

August 2017.