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Ambiguous Life Expectancy and the Demand for Annuities

D'Albis, Hippolyte and Thibault, Emmanuel (2018) Ambiguous Life Expectancy and the Demand for Annuities. Theory and Decision, 85 (3-4). pp. 303-319.

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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 the 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.

Item Type: Article
Language: French
Date: October 2018
Refereed: Yes
JEL Classification: D11 - Consumer Economics - Theory
D81 - Criteria for Decision-Making under Risk and Uncertainty
G11 - Portfolio Choice; Investment Decisions
G22 - Insurance; Insurance Companies
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 22 May 2018 09:30
Last Modified: 24 Jul 2019 11:34
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