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Paper: ETH-RC-12-002

Title: Too Risk Averse to Purchase Insurance? A Theoretical Glance at the Annuity Puzzle

Authors: Antoine Bommier, Francois Le Grand*


Abstract:

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 exists a positive bequest motive, sufficiently risk averse individuals should not purchase annuities. A model calibration accounting for temporal risk aversion generates a willingness-to-pay for annuities, which is significantly smaller than the one generated by a standard Yaari (1965) model. Moreover, the calibration predicts that riskless savings finances one third of consumption, in line with empirical findings. Keywords: annuity puzzle, insurance demand, bequest, intergenerational transfers, temporal risk aversion, multiplicative preferences.


Keywords: annuity puzzle, insurance demand, bequest, intergenerational transfers, temporal risk aversion, multiplicative preferences

Manuscript status:

JEL codes: D11, D81, D91.
PACS numbers:



Local copy of the paper: ETH-RC-12-002.pdf


Submission date: 23-1-2012


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