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Ambiguous Life Expectancy and the Demand for Annuities

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  • d'Albis, Hippolyte
  • Thibault, Emmanuel

Abstract

In this paper, ambiguity aversion to uncertain survival probabilities is introduced in a life-cycle model with a bequest motive to study the optimal demand for annuities. Provided that annuities return is sufficiently large, and notably when it is fair, positive annuitization is known to be the optimal strategy of ambiguity neutral individuals. Conversely, we show that the demand for annuities decreases with ambiguity aversion and that there exists a finite degree of aversion above which the demand is non positive: the optimal strategy is then to either sell annuities short or to hold zero annuities if the former option is not available. To conclude, ambiguity aversion appears as a relevant candidate for explaining the annuity puzzle.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 731.

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Date of creation: Jul 2012
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Handle: RePEc:ide:wpaper:26051

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