Risk aversion and the utility of annuities
A well-known result in life-cycle models with uncertain lifetime is that, absent other sources of uncertainty, egoistic agents should annuitize all their wealth. The gain from access to an annuity market, as measured by the increase in non-annuitized wealth required to obtain the same utility level, has repeatedly been shown to be a positive function of risk aversion in expected-utility models. This paper extends the analysis by considering the recursive utility function introduced by Epstein and Zin. By disentangling risk aversion from the elasticity of intertemporal substitution it is shown that the utility value of annuitization is decreasing with both parameters. The classical Yaari result that access to a fair annuity market leads to the same consumption dynamics as in the certainty scenario is also shown to obtain only in the expected-utility case.
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