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Too risk averse to purchase insurance?

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  • Antoine Bommier

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  • François Grand

    ()

Abstract

This paper suggests a new explanation for the low level of annuitization, which is valid even if one assumes perfect markets. We show that, as soon there is a positive bequest motive, sufficiently risk averse individuals should not purchase annuities. A model calibration accounting for lifetime risk aversion generates a significantly smaller willingness-to-pay for annuities than the one generated by a standard time-additive model. Moreover, the calibration predicts that riskless savings finance one third of consumption, in line with empirical findings. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Antoine Bommier & François Grand, 2014. "Too risk averse to purchase insurance?," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 135-166, April.
  • Handle: RePEc:kap:jrisku:v:48:y:2014:i:2:p:135-166
    DOI: 10.1007/s11166-014-9190-3
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    References listed on IDEAS

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    Cited by:

    1. Drouhin, Nicolas, 2015. "A rank-dependent utility model of uncertain lifetime," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 208-224.

    More about this item

    Keywords

    Annuity puzzle; Insurance demand; Bequest; Intergenerational transfers; Risk aversion; Multiplicative preferences; D11; D81; D91;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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