Joachim Inkmann

How Deep is the Annuity Market Participation Puzzle

Using UK 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, effects in a life-cycle model of annuity and life insurance demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data. For stockholders, a relatively strong bequest motive is sufficient to simultaneously generate balanced portfolios and low annuity demand.

Can the Life Insurance Market Provide Evidence for a Bequest Motive

Using U.K. microeconomic data, we analyze the empirical determinants of participation in the life insurance market. We find that term insurance demand is positively correlated with measures of bequest motives like being married, having children and/or subjective measures of strong bequest motives. We then show that a life-cycle model of life insurance demand, saving and portfolio choice can rationalize quantitatively the data in the presence of a bequest motive. These findings provide evidence supporting the presence of a bequest motive.

Monte Carlo Investigation

With the first Monte Carlo experiment (which is extracted from Inkmann, 2000) it is attempted to provide evidence on the small sample performance of three estimators which are efficient in three different classes of estimators using an increasing amount of distributional information. The first estimator is the conventional two-step GMM estimator, labeled GMM2 from now on, using the estimator (7.1.1) of the optimal weight matrix. It has been shown in Section 5.2 that this estimator reaches the efficiency bound Λu for a given set of unconditional moment functions. The second estimator under consideration results from using the GMM2 estimator as an initial estimator for the estimation of the unknown optimal instruments. The three-step estimator, GMM3, which is based on these optimal instruments attains the efficiency bound Λc for a given set of conditional moment functions. Because conditional moment restrictions imply an infinite set of orthogonality conditions, the asymptotic efficiency advantage of GMM3 is achieved by imposing a stronger distributional assumption. For the estimation of the optimal instruments the K-nearest neighbor approach presented in Section 8.3 is chosen which is particularly simple to implement. The third estimator is a maximum likelihood estimator which requires a specification of the complete conditional distribution and achieves the efficiency bound in the class of parametric estimators. Therefore the ML estimator can be regarded as a benchmark for the two GMM estimators.

Estimating Firm Size Elasticities of Product and Process R&D

This paper provides an empirical test of the particular product life-cycle hypothesis which postulates that the firm size elasticity of process R&D exceeds the firm size elasticity of product R&D. Panel data on German manufacturing firms is used which is affected by attrition and sample selection. An inverse probability weighted generalized empirical likelihood (GEL) estimator is proposed, which corrects for the selectivity bias under the identifying assumption of conditionally independent selection and benefits from the superior small sample bias properties of GEL compared to generalized method of moments (GMM). The product life-cycle hypothesis is clearly rejected in all specifications.

The Term Structure of Funding Spreads

Defined benefit pension liabilities are usually computed by discounting promised future pension payments using the yields on either risk-free or AA-rated bonds. We argue that a pension plan in financial distress should use discount rates that reflect the inherent funding risk. We propose a new valuation approach that utilizes the term structure of funding-risk-adjusted discount rates. These discount rates depend on the current asset allocation of the pension plan which affects expected future funding ratios. We show that an optimal asset allocation which accounts for this dependency varies in a highly nonlinear way with the initial funding ratio of the pension plan. In particular, the optimal allocation to stocks is higher than conventionally determined when the level of underfunding is severe, but lower when the level of underfunding is only moderate

Langfristige Folgen eines mißglückten Übergangs von der Lehre in den Beruf

In der vorliegenden Studie versuchen wir, die Auswirkungen auf die langfristigen Einkommenspotentiale empirisch zu ermitteln, welche ein misgluckter Ubergang von der Ausbildung im dualen System in das regulare Berufsleben verursacht. Die bewuste Konzentration auf diese Schwelle des Markteintritts junger Erwerbspersonen tragt der Tatsache Rechnung, das in Deutschland sowohl das Risiko als auch die Dauer fruher Arbeitslosigkeitsepisoden fur die Altersgruppe der 20- bis 24jahrigen ausgepragter sind als fur die Altersgruppe der 15- bis 19jahrigen. Eine Erklarung fur diese empirische Beobachtung konnte eine Hypothese liefern, nach der das in Deutschland traditionell relativ geringe Problem der Jugendarbeitslosigkeit durch die Lehre lediglich auf die Absolventen des dualen Ausbildungssystems verlagert wird. Tatsachlich scheint die Schaffung von Lehrstellen in der politischen Diskussion eine wesentlich grosere Rolle zu spielen als die sich anschliesende Hurde des Ubergangs von der Lehre in den Beruf.

Life-Cycle Patterns in the Design and Adoption of Default Funds in DC Pension Plans

We argue that we should see a negative relationship between the share of risky assets in the default fund of a de…ned contribution (DC) pension plan and the average plan member age if trustees design the default fund in line with predictions from the life-cycle portfolio choice theory. Adoption of the default fund should be low in DC plans with high member age dispersion if default funds are indeed designed for the average plan member and members become aware of this. From analyzing a panel dataset of Australian DC pension plans, we obtain results that are consistent with both hypotheses.

Inverse Probability Weighted Generalised Empirical Likelihood Estimators: Firm Size and R&D Revisited

The inverse probability weighted Generalised Empirical Likelihood (IPW-GEL) estimator is proposed for the estimation of the parameters of a vector of possibly non-linear unconditional moment functions in the presence of conditionally independent sample selection or attrition.The estimator is applied to the estimation of the firm size elasticity of product and process R&D expenditures using a panel of German manufacturing firms, which is affected by attrition and selection into R&D activities.IPW-GEL and IPW-GMM estimators are compared in this application as well as identification assumptions based on independent and conditionally independent sample selection.The results are similar in all specifications.

Assessing the Demand for Annuities in an Undeveloped Market: Evidence from Hong Kong

How to design an attractive annuity for an undeveloped market and how to assess the potential demand for such a product? We first conduct a discrete choice experiment among participants of a large-scale occupational defined contribution pension scheme in Hong Kong to identify desired product characteristics of an annuity. The preferred annuity is sold by an A-rated insurance company, provides nominal annuity payouts and a 10-year period-certain guarantee. Using a second survey, we then analyze the demand for the preferred annuity. Close to one third of respondents chooses to annuitize, a fraction that considerably exceeds observed annuitization rates in developed markets. Regarding household characteristics, we find that annuity demand decreases with general financial literacy but increases with specific knowledge about the annuity product. Remarkably, a self-reported bequest motive increases the demand for an annuity providing a 10-year period-certain guarantee.

Parametric Portfolio Policies in the Surplus Consumption Ratio

The surplus consumption ratio plays a central role as a state variable in successful attempts to explain the time series properties of stock and bond prices with consumption-based asset pricing models. In this paper, optimal portfolio policies for a strategic investor who maximizes the conditionally expected utility of terminal wealth are parameterized as a polynomial in the surplus consumption ratio. Optimal portfolio policies are estimated using a method of moments estimator based on Euler equations. Unconditional portfolio policies are rejected in favor of conditional policies. Lower order polynomials are rejected in favor of higher order polynomials. Optimal stock and bond allocations are clearly countercyclical.