The Family as an Incomplete Annuities Market

A new empirical study of the relation between money, nominal income, prices, and real output in postwar quarterly U.S. data rejects virtually all of the conclusions reached by Families provide individuals with risk sharing opportunities which may not otherwise be available. Within the family there is a degree of trust and a level of information which alleviates three key problems in the provision of insurance by markets open to the general public, namely, moral hazard, adverse selection, and deception. The informational advantages of pooling risk within families must be set against the inability of families to provide complete insurance because of the small size of the risk pooling group. This paper demonstrates how families can provide insurance against uncertain dates of death. Death risk sharing family arrangements effectively constitute an incomplete annuities market. Our analysis indicates that these arrangements even in small families can substitute by more than70% for complete annuities. Given the adverse selection problem and transactions costs in public annuity markets, risk pooling in families may well be preferred to purchasing market annuities. In the absence of organized public markets in annuities, these risk sharing arrangements provide powerful economic incentives for marriage and family formation. The paper suggests that inter-family transfers need have nothing to do with altruistic feelings; rather, they may simply reflect risk sharing behavior of completely selfish family members.

The Impact of Annuity Insurance on Savings and Inequality

This is the first paper to document the effect of health on the migration propensities of African Americans in the American past. Using both IPUMS and the Colored Troops Sample of the Civil War Union Army Data, I estimate the effects of literacy and health on the migration propensities of African Americans from 1870 to 1910. I find that literacy and health shocks were strong predictors of migration and the stock of health was not. There were differential selection propensities based on slave status—former slaves were less likely to migrate given a specific health shock than free blacks. Counterfactuals suggest that as much as 35% of the difference in the mobility patterns of former slaves and free blacks is explained by differences in their human capital, and more than 20% of that difference is due to health alone. Overall, the selection effect of literacy on migration is reduced by one-tenth to one-third once health is controlled for. The low levels of human capital accumulation and rates of mobility for African Americans after the Civil War are partly explained by the poor health status of slaves and their immediate descendants.

Annuity Markets, Savings, and the Capital Stock

This article examines how the availability of annuities affects savings and inequality in economies in which neither private nor public pensions initially exist. The absence of widespread market or government annuity insurance is clearly descriptive of many less developed countries in the world today; it was also a characteristic of virtually all countries prior to World War II. The paper compares economies with perfect insurance with economies in which completely selfish parents and children pool longevity risk to their mutual advantage. The analysis of the latter economies takes into account the infinite sequence of risk sharing bargains of successive parents with their children. Such bargains affect current risk sharing between parents and child because they determine the welfare of current children when they become parents. Calculations based on the CBS utility function indicate that perfecting annuity insurance can significantly reduce national savings. Indeed, the insurance aspects of government pensions are potentially as important as underfunding government pensions in reducing national savings.