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Ambiguous Life Expectancy and the Demand for Annuities

Hippolyte D'Albis 1, 2, Emmanuel Thibault 3, 4, 5

(2012-07)

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.

1:	Ecole d'Économie de Paris - Paris School of Economics (EEP-PSE)
	Ecole d'Économie de Paris
2:	Centre d'économie de la Sorbonne (CES)
	CNRS : UMR8174 – Université Paris I - Panthéon-Sorbonne
3:	Toulouse School of Economics
	TSE
4:	CDED
	Université de Perpignan
5:	IDEI
	Université Toulouse I [UT1] Capitole

Research team: Axe Macroéconomie

Subject

:

Humanities and Social Sciences/Economy and finances

Keyword(s): Demand for annuities – uncertain survival probabilities – ambiguity aversion

halshs-00721281, version 1

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From: Lucie Label <>

Submitted on: Friday, 27 July 2012 10:19:29

Updated on: Friday, 27 July 2012 10:24:48