Value of Life and Annuity Demand

42 Pages Posted: 12 Jun 2020 Last revised: 23 Apr 2021

See all articles by Svetlana Pashchenko

Svetlana Pashchenko

University of Georgia

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo)

Date Written: May 30, 2020

Abstract

How does the value of life affect annuity demand? To address this question, we construct a portfolio choice problem with three key features: i) agents have access to life-contingent assets, ii) they always prefer living to dying, iii) agents have non-expected utility preferences. We show that as utility from being alive increases, annuity demand decreases (increases) if agents are more (less) averse to risk rather than to intertemporal fluctuations. Put differently, if people prefer early resolution of uncertainty, they are less interested in annuities when the value of life is high. Our findings have two important implications. First, we get better understanding of the well-known annuity puzzle. Second, we argue that the observed low annuity demand provides evidence that people prefer early rather than late resolution of uncertainty.

Keywords: annuities, value of a statistical life, portfolio choice problem, life-contingent assets, longevity insurance

JEL Classification: D91, G11, G22

Suggested Citation

Pashchenko, Svetlana and Porapakkarm, Ponpoje, Value of Life and Annuity Demand (May 30, 2020). Available at SSRN: https://ssrn.com/abstract=3614884 or http://dx.doi.org/10.2139/ssrn.3614884

Svetlana Pashchenko (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan
+818095248741 (Phone)

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