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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

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Source Normalized Impact per Paper (SNIP) 2018: 0.186

Mathematical Citation Quotient (MCQ) 2018: 0.08

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1935-1704
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Annuity Markets and Capital Accumulation

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

Abstract

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

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About the article

Published Online: 2019-11-28


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

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