The impact of risk aversion and ambiguity aversion on annuity and saving choices

Eric André, Antoine Bommier and François Le Grand
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Antoine Bommier: ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]
François Le Grand: EM - EMLyon Business School, ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]

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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.

Keywords: Recursive utility; Lifecycle model; Ambiguity aversion; Risk aversion; Saving choices; Annuity puzzle (search for similar items in EconPapers)
Date: 2022-08-01
New Economics Papers: this item is included in nep-rmg and nep-upt
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Published in Journal of Risk and Uncertainty, 2022, 65 (1), 33-56 p. ⟨10.1007/s11166-022-09386-9⟩

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Journal Article: The impact of risk aversion and ambiguity aversion on annuity and saving choices (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04325572

DOI: 10.1007/s11166-022-09386-9

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