[Using microeconomic data for the United Kingdom, 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 and life insurance demand, saving, and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data. For stockholders, a strong bequest motive can simultaneously generate balanced portfolios and low annuity demand.]

Using a calibrated, collective life-cycle portfolio choice model for a dual-income couple, we show that an increase in the ability to share risk within the household due to a mean-preserving spread in the partners’ coefficients of relative risk aversion leads to a substantial increase in financial risk-taking. Importantly, we show that risk sharing has a larger economic impact on portfolio choice than risk diversification. While unitary models usually do not fully replicate the optimal portfolio choice of collective models, we propose approximations that work reasonably well for moderate background risk. We provide strong empirical support for our key findings.

Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We nd that annuity market participation increases with nancial 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, eects 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.