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How deep is the annuity market participation puzzle?

By Joachim Inkmann, Paula Lopes and Alexander Michaelides

Abstract

Using U.K. microeconomic data, 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, e¤ects 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

Topics: HF Commerce, HG Finance, HB Economic Theory
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2007
OAI identifier: oai:eprints.lse.ac.uk:24488
Provided by: LSE Research Online

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