Economic Growth and Longevity Risk with Adverse Selection

We study a closed economy featuring heterogeneous agents and exhibiting endogenous economic growth due to interfirm external effects. Individual agents differ in terms of their mortality profile. At birth, nature assigns a health status to each agent. Health type is private information and annuity firms can only observe an agent’s age. In the presence of longevity risk, agents want to annuitize their wealth conform the classic result by Yaari (1965). In the first-best case with perfect annuities, the market would feature a separating equilibrium (SE) in which each health type obtains an actuarially fair perfect insurance. In the SE all agents are savers throughout their lives. The informational asymmetry precludes the attainment of the first-best equilibrium, however, as healthy individuals have a strong incentive to misrepresent their type by claiming to be unhealthy. Using the equilibrium concept of Pauly (1974) and Abel (1986), we prove the existence of a second-best pooling equilibrium (PE) in which individuals of all types annuitize at a common pooling rate. As the unhealthy get close to their maximum attainable age, the pooling rate prompts such individuals to become net borrowers. But borrowing would reveal their health status, so the best the unhealthy can do is to impose a borrowing constraint on themselves during their autumn years. Using a plausibly calibrated version of the model we find that the growth- and welfare effects of PE versus SE are rather small, whilst those of PE versus no annuities at all (NAE) are rather large. An imperfect insurance is better than no insurance at all, both at the microeconomic and at the macroeconomic level.annuity markets, adverse selection, endogenous growth, overlapping generations, demography

The Tragedy of Annuitization

We construct a tractable discrete-time overlapping generations model of a closed economy and use it to study government redistribution of accidental bequests and private annuities in general equilibrium. Individuals face longevity risk as there is a positive probability of passing away before the retirement period. We find non-pathological cases where it is better for long-run welfare to waste accidental bequests than to give them to the elderly. Next we study the introduction of a perfectly competitive life insurance market offering actuarially fair annuities. There exists a tragedy of annuitization: although full annuitization of assets is privately optimal it is not socially beneficial due to adverse general equilibrium repercussions.longevity risk, risk sharing, overlapping generations, intergenerational transfers, annuity markets

Information networks in Africa: a collaborative (FAO/SAIAB) project investigating mechanisms of document exchange and the preservation of grey literature.

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Human capital accumulation and the macroeconomy in an ageing society

How do population ageing shocks affect the long-run macroeconomic performance of an economy? To answer this question we build a general equilibrium overlapping generations model of a closed economy featuring endogenous factor prices. Finitely-lived individuals are endowed with perfect foresight and make optimal choices over the life cycle. In addition to selecting age profiles for consumption and the hours of time supplied to the labour market, they also choose their schooling level and retirement age. Human capital is accumulated as a result of work experience, the extent of which is determined by the intensity of labour supply. As the agent gets older, biological deterioration sets in and human capital depreciates at an increasing rate. This ultimately prompts the agent to withdraw from the labour market. The microeconomic and macroeconomic effects of three ageing shocks are studied, namely a biological longevity boost, a comprehensive longevity boost, and a baby bust. Robustness checks are performed by allowing for capital market imperfections and indivisibility of labour supply

Longevity Shocks with Age-Dependent Productivity Growth

The aim of this paper is to study the long-run effects of a longevity increase on individual decisions about education and retirement, taking macroeconomic repercussions through endogenous factor prices and the pension system into account. We build a model of a closed economy inhabited by overlapping generations of finitely-lived individuals whose labour productivity depends on their age through the build-up of labour market experience and the depreciation of human capital. We make two contributions to the literature on the macroeconomics of population ageing. First we show that it is important to recognize that a longer life need not imply a more productive life and that this matters for the affordability of an unfunded pension system. Second, we find that factor prices could move in a direction opposite to the one accepted as conventional wisdom following an increase in longevity, depending on the corresponding change in the age-productivity profile

The Kelvin-wave cascade in the vortex filament model

The energy transfer mechanism in zero temperature superfluid turbulence of helium-4 is still a widely debated topic. Currently, the main hypothesis is that weakly nonlinear interacting Kelvin waves transfer energy to sufficiently small scales such that energy is dissipated as heat via phonon excitations. Theoretically, there are at least two proposed theories for Kelvin-wave interactions. We perform the most comprehensive numerical simulation of weakly nonlinear interacting Kelvin-waves to date and show, using a specially designed numerical algorithm incorporating the full Biot-Savart equation, that our results are consistent with nonlocal six-wave Kelvin wave interactions as proposed by L'vov and Nazarenko.Comment: 6 pages, 6 figure