Optimal Annuitization with Stochastic Mortality Probabilities
AbstractThe conventional wisdom dating back to Yaari (1965) is that households without a bequest motive should fully annuitize their investments. Numerous market frictions do not break this sharp result. We modify the Yaari framework by allowing a household's mortality risk itself to be stochastic. Annuities still help to hedge longevity risk, but they are now subject to valuation risk. Valuation risk is a powerful gateway mechanism for numerous frictions to reduce annuity demand, even without ad hoc “liquidity constraints.” We find that most households should not annuitize any wealth. The optimal level of aggregate net annuity holdings is likely even negative.
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Date of creation: Jul 2013
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Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
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