TY - JOUR
T1 - Optimal life insurance and annuity demand under hyperbolic discounting when bequests are luxury goods
AU - Zhang, Jinhui
AU - Purcal, Sachi
AU - Wei, Jiaqin
N1 - Publisher Copyright:
© 2020 Elsevier B.V.
PY - 2021/11
Y1 - 2021/11
N2 - We operationalise the theoretical modelling of Marín-Solano and Jorge Navas (2010), seeking to understand the consequences for optimal consumption, life insurance and annuity demand in a time inconsistent world, by incorporating the insurance insights from Richard (1975). Richar, in particular, has an elegant treatment of optimal annuity demand, rarely harnessed in the literature. Central to Richard's creation of demand for personal insurance is a bequest motive and, in addition to implementing time inconsistency through hyperbolic discounting, our analysis is further expanded to include naïve and sophisticated agents with a luxury bequest motive (Lockwood, 2012). Compared to a more simplistic ‘necessity’ bequest framework, luxury bequests (broadly) weaken optimal life insurance demand and strengthen optimal life annuity demand for the less wealthy. In contrast, time inconsistency offers a wide spectrum of outcomes, and our modelling, calibrated to Swiss data, contributes to understanding the annuity puzzle—observed low levels of (voluntary) purchases of life annuities.
AB - We operationalise the theoretical modelling of Marín-Solano and Jorge Navas (2010), seeking to understand the consequences for optimal consumption, life insurance and annuity demand in a time inconsistent world, by incorporating the insurance insights from Richard (1975). Richar, in particular, has an elegant treatment of optimal annuity demand, rarely harnessed in the literature. Central to Richard's creation of demand for personal insurance is a bequest motive and, in addition to implementing time inconsistency through hyperbolic discounting, our analysis is further expanded to include naïve and sophisticated agents with a luxury bequest motive (Lockwood, 2012). Compared to a more simplistic ‘necessity’ bequest framework, luxury bequests (broadly) weaken optimal life insurance demand and strengthen optimal life annuity demand for the less wealthy. In contrast, time inconsistency offers a wide spectrum of outcomes, and our modelling, calibrated to Swiss data, contributes to understanding the annuity puzzle—observed low levels of (voluntary) purchases of life annuities.
KW - Annuity puzzle
KW - Dynamic programming
KW - Finance
KW - Hyperbolic discounting
KW - Luxury bequests
UR - https://www.scopus.com/pages/publications/85087667417
U2 - 10.1016/j.insmatheco.2020.07.003
DO - 10.1016/j.insmatheco.2020.07.003
M3 - 文章
AN - SCOPUS:85087667417
SN - 0167-6687
VL - 101
SP - 80
EP - 90
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
ER -