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American Economic Review Vol. 95 No. 5 2005

Annuities and Individual Welfare

Thomas Davidoff1; Jeffrey R. Brown2; Peter A. Diamond3

1 Haas School of Business, UC Berkeley, Berkeley, CA 94720. · 2 Department of Finance, University of Illinois at Urbana-Champaign, 340 Wohlers Hall, MC-706, Champaign, IL 61820, and National Bureau of Economic Research. · 3 MIT Department of Economics, 50 Memorial Drive, Cambridge, MA 02142

Abstract

Advancing annuity demand theory, we present sufficient conditions for the optimality of full annuitization under market completeness which are substantially less restrictive than those used by Menahem E. Yaari (1965). We examine demand with market incompleteness, finding that positive annuitization remains optimal widely, but complete annuitization does not. How uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk. A new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization, suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases.

DOI
10.1257/000282805775014281
Volume
95
Issue
5
Pages
1573-1590
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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