An Experimental Test of the Under-Annuitization Puzzle with Smooth Ambiguity and Charitable Giving

Abstract

In a life-cycle model with a bequest motive, we study the impact of smooth ambiguity aversion to uncertain survival probabilities on the optimal demand for annuities. We implement a theory-driven laboratory experiment. First, a subject's ambiguity attitude is elicited in a simple experimental setting able to make the smooth ambiguity model operational. Then, in a two-period annuity-bequest decision problem, the subject's bequest in the second period is presented as a donation to a previously chosen charity, contingent to the subject being active after the first period. In line with the theoretical predictions, we find that ambiguity-averse (resp., loving) subjects invest less (resp., more) in annuities than ambiguity-neutral ones. Furthermore, subjects'contingent donation to the chosen charity increases in their investment in annuities only for sufficiently high levels of warm-glow altruism.

Replaces

Giuseppe Marco Attanasi, Hippolyte D'Albis, and Emmanuel Thibault, “An Experimental Test of the Under-Annuitization Puzzle with Smooth Ambiguity and Charitable Giving”, TSE Working Paper, n. 18-932, July 2018.

Reference

Giuseppe Marco Attanasi, Hippolyte D'Albis, and Emmanuel Thibault, “An Experimental Test of the Under-Annuitization Puzzle with Smooth Ambiguity and Charitable Giving”, Journal of Economic Behavior and Organization, vol. 180, December 2020, pp. 694–717.