What's Wrong with Annuity Markets?

The annuity market in the US has been historically small. What drives this fact? The annuity market could be small because of adverse selection or supply-side frictions in insurance markets. Identifying demand- and supply-side frictions is difficult without data separately measuring exogenous shocks and endogenous responses. In this paper, we provide a novel identification using annuity price data and regulatory capital requirements. Using publicly available data, we document a robust relationship between shocks originating in the corporate bond market and annuity price markups. We show that this relationship supports a standard model of adverse selection with an incomplete bond market