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Ambiguous Life Expectancy and the Demand for Annuities

Author

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  • Hippolyte D'Albis

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

  • Emmanuel Thibault

    () (Toulouse School of Economics - TSE, CDED - Centre de Droit Economique et du Développement - UPVD - Université de Perpignan Via Domitia, IDEI - UT1 - Université Toulouse 1 Capitole)

Abstract

In this paper, ambiguity aversion to uncertain survival probabilities is introduced in a life-cycle model with a bequest motive to study the optimal demand for annuities. Provided that annuities return is sufficiently large, and notably when it is fair, positive annuitization is known to be optimal strategy of ambiguity neutral individuals. Conversely, we show that the demand for annuities decreases with ambiguity aversion and that there exists a finite degree of aversion above which the demand is non positive : the optimal strategy is then to either sell annuities short or to hold zero annuities if the former option is not available. To conclude, ambiguity aversion appears as a relevant candidate for explaining the annuity puzzle.

Suggested Citation

  • Hippolyte D'Albis & Emmanuel Thibault, 2012. "Ambiguous Life Expectancy and the Demand for Annuities," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00721281, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00721281 Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00721281
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    References listed on IDEAS

    as
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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, pages 208-224.

    More about this item

    Keywords

    Demand for annuities; uncertain survival probabilities; ambiguity aversion; aversion à l'ambigüité; Rente viagère; probabilité de survie incertaine;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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