Heterogeneous early health signals and deferred annuities

Abstract

According to an influential study on uncertainty resolution, offering deferred annuities to annuitants with identical early health signal eliminates adverse selection by completely crowding out the immediate annuity market. However, identical early health signal may not be an appropriate assumption when deferred annuities are offered to annuitants at their prime working years. We provide a more general specification of health information revelation process, in which annuitants’ early health signals are heterogeneous and have some, but not full, predictive power about future survival probabilities. It is shown that both deferred and immediate annuity transactions coexist in this case. Using the general framework which nests identical early signal as a limiting case, we explain and reconcile both sets of results.