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Long-term care insurance, annuities and asymmetric information: the case for bundling contracts

Webb, David C. (2006) Long-term care insurance, annuities and asymmetric information: the case for bundling contracts. Discussion paper: UBS Pensions Series 034, 530. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

Within an asymmetric information set-up in which individuals di¤er in terms of their risk aversion and can choose whether or not to take preventative action, we illustrate in a uni…ed framework the equilibrium possibilities with stand-alone long-term care insurance and annuity contracts. With costs of administering insurance, so that insurance is unfair, we show the existence of an equilibrium in which the risk averse type, who take more preventative action, obtain more of both types of insurance, even though their probability of using long-tern care coverage is lower than the less risk averse. Hence, we show that the empirical observations of Finkelstein and Poterba (2004) and Finkelstein and McGarry (2003) are consistent with simultaneous separating equilibria in the two markets. A key …nding of the paper is that as individuals who take care will be relatively low risk in the long-term care insurance market but high risk in the annuities market, with the opposite being the case for those who take less preventative action, an equilibrium exists in bundled contracts that Pareto dominates the outcome with stand-alone contracts.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2006 The Author
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HJ Public Finance
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 530
Date Deposited: 16 Jul 2009 13:59
URL: http://eprints.lse.ac.uk/24507/

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