Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

IMPACT FACTOR 2018: 0.173
5-year IMPACT FACTOR: 0.248

CiteScore 2018: 0.24

SCImago Journal Rank (SJR) 2018: 0.163
Source Normalized Impact per Paper (SNIP) 2018: 0.186

Mathematical Citation Quotient (MCQ) 2018: 0.08

See all formats and pricing
More options …

Annuity Markets and Capital Accumulation

Shantanu Bagchi / James A. Feigenbaum
Published Online: 2019-11-28 | DOI: https://doi.org/10.1515/bejte-2018-0055


We examine how the absence of annuities in financial markets affects capital accumulation in a two-period overlapping generations model. Our findings indicate that the effect on capital is ambiguous in general equilibrium, because there are two competing mechanisms at work. On the one hand, the absence of annuities increases the price of old-age consumption relative to the price of early-life consumption. This induces a substitution effect that reduces saving and capital, and an income effect that has the opposite effect as households want to consume less when young, causing them to save more. On the other hand, accidental bequests originate from the assets of the deceased under missing annuity markets. The bequest received in early life always has a positive income effect on saving, but the bequest received in old age, conditional on survival, is effectively a partial annuity with both substitution and income effects. We find that when the desire to smooth consumption is high, the income effects dominate, so the capital stock always increases when annuity markets are missing. However, when the desire to smooth consumption is low, the substitution effects dominate, and the capital stock decreases with missing annuity markets.

Keywords: mortality risk; frictionless annuities; accidental bequests; savings; capital stock

JEL Classification: D15; D52; E21


  • Arias, E. 2004. “United States Life Tables, 2001.” National Vital Statistics Reports 52 (14): 1-40.Google Scholar

  • Bagchi, Shantanu, and James A. Feigenbaum. 2019. “Taking Advantage of a Missing Market.” Work in Progress.Google Scholar

  • Bernheim, B. Douglas. 2001. “Taxation and Saving.” In Handbook of Public Economics, vol. 3, edited by A. J. Auerbach and M. Feldstein, 1173–249. Amsterdam: North-Holland.Google Scholar

  • Davidoff, Thomas, Jeffrey R. Brown, and Peter A. Diamond. 2005. “Annuities and Individual Welfare.” American Economic Review 95 (3): 1573–90.CrossrefGoogle Scholar

  • Davies, James B. 1989. “Uncertain Lifetime, Consumption, and Dissaving in Retirement.” Journal of Political Economy 89: 561–77.Google Scholar

  • Deaton, Angus, and Christina Paxson. 1994. “Intertemporal Choice and Inequality.” Journal of Political Economy 102: 437–67.CrossrefGoogle Scholar

  • Deaton, Angus, and Christina Paxson. 1998. “Aging and Inequality in Income and Health.” American Economic Review 88: 248–53.Google Scholar

  • Eckstein, Zvi, Martin S. Eichenbaum, and Dan Peled. 1985. “The Distribution of Wealth and Welfare in the Presence of Incomplete Annuity Markets.” The Quarterly Journal of Economics 100 (3): 789–806.CrossrefGoogle Scholar

  • Feigenbaum, James A., Emin Gahramanov, and Xueli Tang. 2013. “Is It Really Good to Annuitize?” Journal of Economic Behavior and Organization 93: 116–40.Web of ScienceCrossrefGoogle Scholar

  • Heijdra, Ben J., Jochen O. Mierau, and Laurie S. M. Reijnders. 2014. “The Tragedy of Annuitization.” Macroeconomic Dynamics 18 (7): 1607-34.Google Scholar

  • Hurd, Michael D. 1989. “Mortality Risk and Bequests.” Econometrica 57: 779–813.CrossrefGoogle Scholar

  • Johnson, Richard W., Leonard E. Burman, and Deborah I. Kobes. 2004. “Annuitized Wealth at Older Ages: Evidence from the Health and Retirement Study.” In Final Report to the Employee Benefits Security Administration, U.S. Department of Labor.Google Scholar

  • Pashchenko, Sveltana. 2013. “Accounting for Non-Annuitization.” Journal of Public Economics 98: 53–67.CrossrefWeb of ScienceGoogle Scholar

  • Reichling, Felix, and Kent Smetters. 2015. “Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs.” American Economic Review 105 (11): 3273–320.Web of ScienceCrossrefGoogle Scholar

  • Yaari, Menahem, E. 1965. “Uncertain Lifetime, Life Insurance and the Theory of the Consumer.” Review of Economic Studies 32: 137–50.CrossrefGoogle Scholar

About the article

Published Online: 2019-11-28

Citation Information: The B.E. Journal of Theoretical Economics, Volume 20, Issue 1, 20180055, ISSN (Online) 1935-1704, DOI: https://doi.org/10.1515/bejte-2018-0055.

Export Citation

© 2019 Walter de Gruyter GmbH, Berlin/Boston.Get Permission

Comments (0)

Please log in or register to comment.
Log in