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Asymmetric information, long-term care insurance, and annuities: the case for bundled contracts

Webb, David C. (2009) Asymmetric information, long-term care insurance, and annuities: the case for bundled contracts. Journal of Risk and Insurance, 76 (1). pp. 53-85. ISSN 0022-4367

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Identification Number: 10.1111/j.1539-6975.2009.01288.x


This article examines the markets for long-term care insurance and annuities when there is asymmetric information and there are costs of administering contracts. Individuals differ in terms of their risk aversion. Risk-averse individuals take more care of their health and are relatively high risk in the annuities market and relatively low risk in the long-term care insurance market. In the long-term care insurance market, both separating and partial-pooling equilibria are possible. However, in the stand-alone annuity market, only separating equilibria are possible. We show, consistent with the extant empirical research, that in the presence of administration costs the more risk-averse individuals may buy relatively more long-term care insurance and more annuity coverage. Under the same assumptions, we show that equilibria exist with bundled contracts that Pareto dominate the outcomes with stand-alone contracts and are robust to competition from stand-alone contracts. The remaining empirical puzzle is to explain why bundled contracts are such a small share of the voluntary annuity market.

Item Type: Article
Official URL:
Additional Information: © 2009 The Journal of Risk and Insurance
Divisions: Finance
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 08 Feb 2011 15:52
Last Modified: 20 Jan 2020 03:55

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