IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

How deep is the annuity market participation puzzle?

  • Joachim Inkmann
  • Paula Lopes
  • Alexander Michaelides

Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically-motivated determinants of annuity market participation have the same, quantitatively important, e¤ects in a life-cycle model of annuity demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data, thereby questioning the conventional wisdom that limited annuity market participation is a puzzle to be explained.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://eprints.lse.ac.uk/24488/
File Function: Open access version.
Download Restriction: no

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24488.

as
in new window

Length: 52 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:ehl:lserod:24488
Contact details of provider: Postal:
LSE Library Portugal Street London, WC2A 2HD, U.K.

Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-53, July.
  2. Sule Alan, 2005. "Entry Costs and Stock Market Participation Over the Life Cycle," Working Papers 2005_1, York University, Department of Economics.
  3. Pischke, J.S., 1994. "Measurement Error and Earnings Dynamics: Some Estimates from the PSID Validation Study," Working papers 94-01, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. James Banks & Richard Blundell, 2005. "Private pension arrangements and retirement in Britain," Fiscal Studies, Institute for Fiscal Studies, vol. 26(1), pages 35-53, March.
  5. Wojciech Kopczuk & Joseph Lupton, 2005. "To Leave or Not To Leave: The Distribution of Bequest Motives," NBER Working Papers 11767, National Bureau of Economic Research, Inc.
  6. Michael D. Hurd & Kathleen McGarry, 1997. "The Predictive Validity of Subjective Probabilities of Survival," NBER Working Papers 6193, National Bureau of Economic Research, Inc.
  7. Lopes, Paula & Michaelides, Alexander, 2007. "Rare events and annuity market participation," Finance Research Letters, Elsevier, vol. 4(2), pages 82-91, June.
  8. Pang, Gaobo & Warshawsky, Mark, 2010. "Optimizing the equity-bond-annuity portfolio in retirement: The impact of uncertain health expenses," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 198-209, February.
  9. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2007. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives," NBER Working Papers 13105, National Bureau of Economic Research, Inc.
  10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  11. Mariacristina De Nardi, 2002. "Wealth inequality and intergenerational links," Staff Report 314, Federal Reserve Bank of Minneapolis.
  12. David A. Love, 2010. "The Effects of Marital Status and Children on Savings and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 385-432, January.
  13. Orazio P. Attanasio & Susann Rohwedder, 2003. "Pension Wealth and Household Saving: Evidence from Pension Reforms in the United Kingdom," American Economic Review, American Economic Association, vol. 93(5), pages 1499-1521, December.
  14. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets," Working Papers, Center for Retirement Research at Boston College wp2009-3, Center for Retirement Research, revised Jan 2009.
  15. Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
  16. Richard Blundell & Costas Meghir & Sarah Smith, 2002. "Pension Incentives and the Pattern of Early Retirement," Economic Journal, Royal Economic Society, vol. 112(478), pages C153-C170, March.
  17. John Y. Campbell & Luis M. Viceira, 1998. "Consumption and Portfolio Decisions When Expected Returns Are Time Varying," Harvard Institute of Economic Research Working Papers 1835, Harvard - Institute of Economic Research.
  18. Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA.
  19. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
  20. James Banks & Richard Blundell & Zoë Oldfield & James P. Smith, 2010. "Housing Price Volatility and Downsizing in Later Life," NBER Chapters, in: Research Findings in the Economics of Aging, pages 337-379 National Bureau of Economic Research, Inc.
  21. Benjamin M. Friedman & Mark J. Warshawsky, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 135-154.
  22. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  23. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  24. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, 08.
  25. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the Elderly Save? The Role of Medical Expenses," NBER Working Papers 15149, National Bureau of Economic Research, Inc.
  26. Alexander Michaelides & Serena Ng, 2000. "Estimating the rational expectations model of speculative storage : a Monte Carlo comparison of three simulation estimators," LSE Research Online Documents on Economics 198, London School of Economics and Political Science, LSE Library.
  27. David Blake, 1999. "Annuity Markets: Problems and Solutions," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 24(3), pages 358-375, July.
  28. Valery Polkovnichenko, 2007. "Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 83-124, January.
  29. Dushi, Irena & Webb, Anthony, 2004. "Household annuitization decisions: simulations and empirical analyses," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(02), pages 109-143, July.
  30. Cassio M. Turra & Olivia S. Mitchell, 2004. "The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation," Working Papers wp086, University of Michigan, Michigan Retirement Research Center.
  31. Jeffrey R. Brown & James M. Poterba, 2006. "Household Ownership of Variable Annuities," NBER Chapters, in: Tax Policy and the Economy, Volume 20, pages 163-191 National Bureau of Economic Research, Inc.
  32. Koijen, R.S.J. & Nijman, T.E. & Werker, B.J.M., 2006. "Optimal Portfolio Choice with Annuitization," Discussion Paper 2006-78, Tilburg University, Center for Economic Research.
  33. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
  34. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," Review of Economic Studies, Oxford University Press, vol. 32(2), pages 137-150.
  35. Rosen, H.S.Harvey S. & Wu, Stephen, 2004. "Portfolio choice and health status," Journal of Financial Economics, Elsevier, vol. 72(3), pages 457-484, June.
  36. Francisco Gomes & Alexander Michaelides & Valery Polkovnichenko, 2009. "Optimal Savings with Taxable and Tax-Deferred Accounts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 718-735, October.
  37. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  38. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:24488. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LSERO Manager)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.