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

Antoine Bommier and François Le Grand ()
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François Le Grand: EMLyon Business School, France and ETH Zurich, Switzerland

No 12/157, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

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 (search for similar items in EconPapers)
JEL-codes: D11 D81 D91 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2012-07
New Economics Papers: this item is included in nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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