The impact of risk aversion and ambiguity aversion on annuity and saving choices

We analyze the impact of risk aversion and ambiguity aversion on the competing demands for annuities and bequeathable savings using a lifecycle recursive utility model. Our main finding is that risk aversion and ambiguity aversion have similar effects: an increase in either of the two reduces annuity demand and enhances bond holdings. We obtain this unequivocal result in the flexible intertemporal framework of Hayashi and Miao (2011) by assuming that the agent's preferences are monotone with respect to first-order stochastic dominance. Our contribution is then twofold. First, from a decision-theoretic point of view, we show that monotonicity allows one to obtain clear-cut results about the respective roles of risk and ambiguity aversion. Second, from the insurance point of view, our result that the demand for annuities decreases with risk and ambiguity aversion stands in contrast with what is usually found with other insurance products. As such, it may help explain the low annuitization level observed in the data.