Auctioning Annuities

TL;DR

This paper models the demand and supply of annuities in Chile's private market, analyzing how auction mechanisms and risk ratings affect pension outcomes amid heterogeneity in costs and preferences.

Contribution

It introduces a detailed model of annuity markets with private information, and evaluates the impact of auction design and risk ratings on pension provision.

Findings

Market performs well despite heterogeneity.

Simplifying mechanisms can increase pensions for high-savers.

Risk ratings influence market outcomes.

Abstract

We propose and estimate a model of demand and supply of annuities. To this end, we use rich data from Chile, where annuities are bought and sold in a private market via a two-stage process: first-price auctions followed by bargaining. We model firms with private information about costs and retirees with different mortalities and preferences for bequests and firms' risk ratings. We find substantial costs and preference heterogeneity, and because there are many firms, the market performs well. Counterfactuals show that simplifying the current mechanism with English auctions and "shutting down" risk ratings increase pensions, but only for high-savers.