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(UBS Paper 044) How Deep is the Annuity Market Participation Puzzle?


  • Alex Michaelides


  • Paula Lopes


  • Joachim Inkmann


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, effects 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.JEL Classification: E21, H00.Key Words: Annuities, portfolio choice, bequest motive.

Suggested Citation

  • Alex Michaelides & Paula Lopes & Joachim Inkmann, 2007. "(UBS Paper 044) How Deep is the Annuity Market Participation Puzzle?," FMG Discussion Papers dp593, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp593

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    References listed on IDEAS

    1. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
    2. Roland Benabou & Guy Laroque, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 921-958.
    3. Andrew R. Jackson, 2005. "Trade Generation, Reputation, and Sell-Side Analysts," Journal of Finance, American Finance Association, vol. 60(2), pages 673-717, April.
    4. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, February.
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    Cited by:

    1. Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia Mitchell, 2012. "Do Consumers Know How to Value Annuities? Complexity as a Barrier to Annuitization," Working Papers WR-924-SSA, RAND Corporation.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H00 - Public Economics - - General - - - General

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