Working Paper: NBER ID: w23648
Authors: Frank N. Caliendo; Aspen Gorry; Sita Slavov
Abstract: 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.
Keywords: Survival Ambiguity; Welfare; Annuities
JEL Codes: D80; D91; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| survival ambiguity (D80) | welfare cost (D69) |
| absence of annuity market (G19) | welfare cost due to survival ambiguity (D69) |
| competitive annuity contracts (G22) | welfare cost of survival ambiguity (D69) |
| competitive annuity contracts (G22) | overall welfare (I31) |
| survival ambiguity (D80) | consumption and saving decisions (E21) |
| income quintile (D31) | welfare cost of ambiguity (D69) |