Article in a working paper series:

Hippolyte d'Albis and Emmanuel Thibault, "Ambiguous Life Expectancy and the Demand for Annuities", IDEI Working Paper, n. 731, July 2012.


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.

JEL codes

D11: Consumer Economics: Theory
D81: Criteria for Decision-Making under Risk and Uncertainty
G11: Portfolio Choice
G22: Insurance; Insurance Companies

Research programs

SCOR CHAIR "Market Risk and Value Creation": Longevity risk, long term care (social) insurance