- Universitè Lille
Wednesday, April 12, 2017
Polo Santa Marta, Via Cantarane 24, Room 1.59
In this paper, ambiguity aversion to uncertain survival probabilities is introduced in a life-cycle model with a bequest motive to study the optimal demand for annuities. In a model with smooth ambiguity preferences, we show that positive annuitization is optimal in the ambiguity-neutrality limit case, provided that annuities return is fair.
For the same return, we show that there exists a finite degree of ambiguity aversion above which the demand for annuities is non-positive. Hence, ambiguity aversion is a relevant candidate for explaining the annuity puzzle. We test our theoretical results through a laboratory experiment.
First, a subject’s ambiguity attitude is elicited in a simple experimental setting able to make the smooth ambiguity model operational. Then, in a two-period annuity-bequest decision problem, the subject’s bequest in the second period is resented as a donation to a previously chosen charity, contingent to the subject being active after the first period. We found that coherent-ambiguity-averse subjects invest less in annuities than ambiguity-neutral (and oving) ones. Furthermore, subjects’ contingent donation to the chosen charity slightly increases in their investment in annuities, although the greater the demand for annuities, the smaller the share of earnings a subject uses for the bequest. These findings confirm our theoretical predictions.