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The conventional wisdom dating back to Yaari (1965) is that households without a bequest motive should fully annuitize their investments. Numerous market frictions do not break this sharp result. We modify the Yaari framework by allowing a household's mortality risk itself to be stochastic. Annuities still help to hedge longevity risk, but they are now subject to valuation risk. Valuation risk is a powerful gateway mechanism for numerous frictions to reduce annuity demand, even without ad hoc “liquidity constraints.” We find that most households should not annuitize any wealth. The optimal level of aggregate net annuity holdings is likely even negative.

Zonder onderwerpscode: economie

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Budget --- Fiscal policy --- United States --- United States. --- Appropriations and expenditures.

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Fiscal policy --- Taxation --- Debts, Public --- Gross national product --- Economic indicators --- Mathematical models.

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Fiscal policy --- Economic forecasting --- Mathematical models. --- United States --- Economic policy.