[...]... prospects and other pertinent variables, and the ages at which these differences unfold These questions are at the heart of resolving the “annuity puzzle”: Contrary to theoretical predictions, the market for private annuities is extremely thin, particularly the demand by individuals in their early working years The book starts with a general treatment of survival functions, applications of stochastic... insurance instruments Completion of a book like this presents an opportunity to recognize intellectual debts I studied at MIT during the “golden age” of the 1960s The “explosive exuberance” of the lectures by Paul Samuelson, Robert Solow, and their colleagues, and the discussions (sometimes night-long) with my classmates, have had a durable imprint on my work Modern theory of risk and insurance markets... statics compared to the two- or three-period models customary in the literature The level of mathematics used should be no problem to graduate students in economics or finance I faced major decisions about what not to include in the book, and I would like to point out three omissions First, I do not address the question of the proper investment policy for insurance firms aimed at covering their annuity obligations... savings and growth A number of empirical studies attribute the surge in savings and growth in Asian and other countries to increased longevity of the populations of these countries This chapter sheds light on the debate whether this surge is transitory or permanent Interest in private annuity markets grew as reform proposals for public social security systems called for the creation of funded, privately managed... annuity markets Such an analysis would enable a concrete examination of whether and how the government can improve upon the competitive allocation Not finding a comprehensive treatment of annuities, I decided to write lecture notes, which later evolved into this book So, while this book is pure theory, the motivation came from public economics The modelling in this book is quite general, for example, time... been adequately discussed in the literature Subsequent chapters analyze pooling and separating equilibria in order of increasing complexity A novel application is the possibility of bundling insurance products in order to reduce the adverse selection present in stand-alone markets Applying statistical population theory, we analyze (chapter 12) the macroeconomic effects of annuitization on aggregate... elements into the course First, the rationale for government involvement was postulated to be the shortsightedness of individuals, which came to be called bounded rationality I was aware, of course, that once individuals’ cognitive limitations are introduced in one form or another (a number of behavioral models are now available), this may have implications on other core issues of public economics beyond... Matching of investments and obligations (and the related question of the proper measurement of risks) is an important issue (see, for example, the succinct recent discussion by Merton (2006)), but our focus is on the demand side and I thought that this subject deserves separate treatment Second, the reader will August 22, 2007 Time: 09:47am prelims.tex Preface • xv not find a discussion about the proper... Almost all the chapters in this book contain original material not published previously, and the last chapter (16) presents a suggestion for a new financial instrument, annuity options I have had some encouraging discussions on the implementation of this idea with people who run pension funds It is very much in the spirit of the agenda put forward by Robert Shiller in The New Financial Order (2003): There... book grew out of a graduate course in public economics that I taught at the Hebrew University and Princeton University It is a theory course on market failures, covering issues of externalities, August 22, 2007 Time: 09:47am prelims.tex xiv • Preface public goods, natural monopolies, and second-best corrective taxation Building on the pioneering work of Diamond and Mirrlees (1971) and the vast literature . Equilibria 11 8 14 .1 Introduction 11 8 14 .2 Equilibrium with Asymmetric Information 11 9 14 .3 Optimum Commodity Taxation 12 2 14 .4 Optimum Taxation of Annuities 12 5 Appendix 12 9 Chapter 15 Bundling of Annuities. and Other Insurance Products 13 1 15 .1 Introduction 13 1 15 .2 Example 13 2 Chapter 16 Financial Innovation—Refundable Annuities (Annuity Options) 13 5 16 .1 The Timing of Annuity Purchases 13 5 16 .2. of Annuities 10 9 13 .1 First-best Allocation 10 9 13 .2 Competitive Annuity Market with Full Information 11 2 13 .3 Second-best Optimum Pricing of Annuities 11 3 Appendix 11 6 Chapter 14 Optimum Taxation