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. Provided that annuities return is sufficiently large, and notably when it is fair, positive annuitization is optimal in the ambiguity neutrality limit case. Conversely, the optimal strategy is to sell annuities in case of infinite ambiguity aversion. Then, in a model with smooth ambiguity preferences, there exists a finite degree of ambiguity aversion above which the demand for annuities is non positive. To conclude, ambiguity aversion appears as a relevant candidate for explaining the annuity puzzle.
- Hippolyte d’Albis and Emmanuel Thibault
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