Economic growth in the perpetual-youth model: Implications of the annuity market and demographics

Because of asymmetry in information, the annuity market is less developed t han other segments of financial markets. This paper considers the growth ef fect of the liberalization of the annuity market in the Yaari-Blanchard per petual-youth model in which individuals are faced with a positive but const ant probability of death. We have shown that while the existence of a perfe ct annuity market allows individuals to attend a higher level of lifetime u tility with a given amount of financial wealth, it may cause a fall in huma n capital accumulation and thereby a slowdown in the long-run growth of the economy. We have also shown that demographic changes that lead to "populat ion aging" can have a positive growth effect on the economy because they in duce an increase in human-capital investment.