Annuities and Individual Welfare

31 Pages Posted: 28 Dec 2004

See all articles by Thomas Davidoff

Thomas Davidoff

University of British Columbia (UBC) - Sauder School of Business

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Peter A. Diamond

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: March 17, 2005

Abstract

Advancing annuity demand theory, we present sufficient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by 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.

Keywords: Annuities, annuitization, Social Security, pensions, longevity risk, insurance, standard-of-living, habit

JEL Classification: D11, D91, E21, H55, J14, J26

Suggested Citation

Davidoff, Thomas and Brown, Jeffrey R. and Diamond, Peter A., Annuities and Individual Welfare (March 17, 2005). MIT Department of Economics Working Paper No. 03-15, CRR Working Paper No. 2003-11, AFA 2005 Philadelphia Meetings, Available at SSRN: https://ssrn.com/abstract=405621 or http://dx.doi.org/10.2139/ssrn.405621

Thomas Davidoff

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

Urbana, IL 61801
United States

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Peter A. Diamond (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-344
Cambridge, MA 02142
United States
617-253-3363 (Phone)
617-253-7804 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-253-3363 (Phone)
617-253-7804 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
622
Abstract Views
8,684
Rank
67,771
PlumX Metrics