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

Antoine Bommier

Working Papers from ETH Zurich, Chair of Systems Design

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 (search for similar items in EconPapers)
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Working Paper: Too Risk Averse to Purchase Insurance? A Theoretical Glance at the Annuity Puzzle (2012)
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