Too risk averse to purchase insurance? : A theoretical glance at the annuity puzzle
Bommier, Antoine ; Grand, François
In: Journal of Risk and Uncertainty, 2014, vol. 48, no. 2, p. 135-166
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- This paper suggests a new explanation for the low level of annuitization, which is valid even if one assumes perfect markets. We show that, as soon there is a positive bequest motive, sufficiently risk averse individuals should not purchase annuities. A model calibration accounting for lifetime risk aversion generates a significantly smaller willingness-to-pay for annuities than the one generated by a standard time-additive model. Moreover, the calibration predicts that riskless savings finance one third of consumption, in line with empirical findings.