The impact of risk aversion and ambiguity aversion on annuity and saving choices
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Date
2022-08
Publication Type
Journal Article
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yes
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Abstract
We analyze the impact of risk aversion and ambiguity aversion on the competing demands for annuities and bequeathable savings using a lifecycle recursive utility model. Our main finding is that risk aversion and ambiguity aversion have similar effects: an increase in either of the two reduces annuity demand and enhances bond holdings. We obtain this unequivocal result in the flexible intertemporal framework of Hayashi and Miao (2011) by assuming that the agent's preferences are monotone with respect to first-order stochastic dominance. Our contribution is then twofold. First, from a decision-theoretic point of view, we show that monotonicity allows one to obtain clear-cut results about the respective roles of risk and ambiguity aversion. Second, from the insurance point of view, our result that the demand for annuities decreases with risk and ambiguity aversion stands in contrast with what is usually found with other insurance products. As such, it may help explain the low annuitization level observed in the data.
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published
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Journal / series
Volume
65 (1)
Pages / Article No.
33 - 56
Publisher
Springer
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Edition / version
Methods
Software
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Date collected
Date created
Subject
Recursive utility; Lifecycle model; Ambiguity aversion; Risk aversion; Saving choices; Annuity puzzle
Organisational unit
03877 - Bommier, Antoine / Bommier, Antoine