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Rare events and annuity market participation

By Paula Lopes and Alexander Michaelides

Abstract

We investigate whether a rare event (like the default of the annuity provider) can explain the annuity market participation puzzle. High risk aversion is needed to change behavior in the presence of such a disastrous shock but higher risk aversion also makes annuities more valuable. Therefore, these rare events are unlikely candidates to explain the low take-up of voluntary annuities: the conclusion is robust to disentangling risk aversion from intertemporal substitution and to allowing portfolio investment in a stock market index

Topics: HB Economic Theory
Publisher: Elsevier
Year: 2007
DOI identifier: 10.1016/j.frl.2006.12.001
OAI identifier: oai:eprints.lse.ac.uk:4822
Provided by: LSE Research Online
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