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(UBS Paper 044) How Deep is the Annuity Market Participation Puzzle?

Author

Listed:
  • Alex Michaelides
  • Paula Lopes
  • Joachim Inkmann

Abstract

Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically motivated determinants of annuity market participation have the same, quantitatively important, effects in a life cycle model of annuity demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data, thereby questioning the conventional wisdom that limited annuity market participation is a puzzle to be explained.JEL Classification: E21, H00.Key Words: Annuities, portfolio choice, bequest motive.

Suggested Citation

  • Alex Michaelides & Paula Lopes & Joachim Inkmann, 2007. "(UBS Paper 044) How Deep is the Annuity Market Participation Puzzle?," FMG Discussion Papers dp593, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp593
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp593UBS044.pdf
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    Citations

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    Cited by:

    1. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
    2. Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia Mitchell, 2012. "Do Consumers Know How to Value Annuities? Complexity as a Barrier to Annuitization," Working Papers WR-924-SSA, RAND Corporation.

    More about this item

    Keywords

    annuities; portfolio choice; bequest motive.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H00 - Public Economics - - General - - - General

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