What makes a market for annuity contracts successful, and what are the key demand and supply constraints that affect the performance of such a market?
Summary
In many countries, questions about the structure of annuity markets are becoming increasingly important subjects of policy debates, particularly as pension reforms promote public-private partnerships as a way to improve the financial security of retiring workers. Using data on annuity contracts from Chile, this paper examines an imperfectly competitive market where firms have private information about their annuitization costs.
Key Insights
- Retirees' information processing costs and the weights they assign to firms’ risk ratings in choosing an annuity contract increase with their savings.
- Close to 50% of retirees are unconcerned about leaving a bequest, but the remaining 50% exhibit a strong preference to do so that increases with savings.
- When annuitization costs are commonly known to all firms, pensions for retirees increase, but the gain accrues almost entirely to those with higher savings.
- Using both English auctions and "shutting-down" risk ratings leads to higher pensions in equilibrium, but only for high savers.
