Article in a working paper series:
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.
D11: Consumer Economics: Theory
D81: Criteria for Decision-Making under Risk and Uncertainty
G11: Portfolio Choice
G22: Insurance; Insurance Companies
SCOR CHAIR "Market Risk and Value Creation"
SCOR CHAIR "Market Risk and Value Creation": Longevity risk, long term care (social) insurance