Adverse Selection in Annuity Markets: Evidence from the British Life Annuity Act of 1808

We study adverse selection using data from an 1808 Act of British Parliament that effectively opened a market for life annuities. Our analysis indicates significant selection effects. The evidence for adverse selection is strongest for a sub-sample of annuitants whose annuities were purchased by profit-seeking speculators, a sub-sample in which “advantageous selection” resulting from multi-dimensional heterogeneity is unlikely to have been significant. These results support the view that adverse selection can be masked by advantageous selection in empirical studies of standard insurance markets. JEL N23 D82. ∗ Middlebury College Economics Department, Middlebury, VT 05753. Tel: 802.443.5563. Email: [email protected]. I thank James Poterba, Claudia Goldin, Jerry Hausman, Dora Costa, Peter Temin, Georges Dionne, Norma Coe, Robert Prasch, Raj Chetty and two anonymous referees for helpful comments.