Annuitization and the DARA Hypothesis

Claudio A. Bonilla, University of Chile*

José Luis Ruiz, University of Chile
Pablo Tapia, University of Chile

November 15, 2022

Abstract

We empirically test the Decreasing Absolute Risk Aversion (DARA) hy-

pothesis for individuals who are facing retirement. If an individual exhibits
DARA preferences, insurance is an inferior good and, therefore, we expect
a negative relation between the size of the accumulated pension fund (as a
proxy for wealth) and the probability of choosing an annuity (an insurance
against the risk of longevity). Using data from the Chilean market, we cal-
culate the probability of choosing an annuity. After controlling for the usual
determinants used in the literature of annuity selection, we find that the an-
nuity decision is described by an inverse-U function, where individuals with a
low level of wealth exhibit Increasing Absolute Risk Aversion (IARA) prefer-
ences while individuals with a high level of wealth exhibit DARA preferences.
We provide the economic intuition of this result for the case of a developing
country and discuss its policy implications.

Keywords: Retirement decision, DARA hypothesis, AFP, Annuity.

JEL Classification: G52, H55, D14

* Please send correspondence to Claudio A. Bonilla, School of Economics and Business,

University of Chile, Diagonal Paraguay 257, Santiago, Chile. Tel.+56 22 9783331. Email:
cbonilla@fen.uchile.cl
1 Introduction
There exist some basic assumptions in economic theory that are almost considered
axioms. For example, a negative slope for a well-behaved demand function and a
positive slope for the supply function are the most obvious. These two assumptions
are actually so common that even non-economists understand their basic intuition.
We could say that they are part of the economic know-how that the business com-
munity uses daily in their analysis and jargon.
In more technical economic subfields, we also have common assumptions that are
rarely challenged by the profession. For example, in the economics of risk and in-
surance literature, risk aversion is a generally accepted assumption of well-behaved
preferences from which we derive both optimal demand for insurance coverage and
optimal portfolio investments of risky assets. Another common assumption in this
field is the assumption that agents exhibit DARA (decreasing absolute risk aversion)
preferences. This assumption is very intuitive and it states that the richer the agents
become, the more likely they are to take on risky projects (to accept monetary lotter-
ies) like switching jobs from secure employment into risky entrepreneurship (Cressy,
2000; Bonilla and Vergara, 2013, Hvide and Panos, 2014), or to increase their ex-
posure to risky assets in the stock markets (Arrow, 1971; Levy, 1994). However, in
spite of the previous theoretical prediction about the implications of DARA pref-
erences, the empirical literature we revise in the next section provides cases where
evidence contradicts such predictions. These results brings about the need to em-
pirically determine under what contexts is the DARA hypothesis truly satisfied and
to theorize about why such an obvious and intuitive assumption sometimes fails
in practical decision-making under risk. In the following empirical exercise we will
provide one specific theorization for the failing of the DARA hypothesis that we will
call the “poor country effect”.
A basic implication of the DARA hypothesis is that insurance is an inferior good
and that risky assets in a chosen portfolio are normal goods. Empirical research
has generally confirmed this hypothesis (Guiso, Jappelli and Terlizzese, 1996; Ogaki
and Zhang, 2001; Arrow and Priesbsch, 2014). But there exist some cases where
preferences have contradicted the expected assumption of DARA. For instance, after
controlling for the usual demographics in the insurance literature, Eisenhauer (1997)
found that individual preferences for life insurance demand exhibit IARA (increasing
absolute risk aversion) preferences. Eisenhauer and Halek (1999) also incorporate

2
estimates of higher-order risk effects such as prudence to confirm again that, in the
life insurance market, the DARA hypothesis is rejected.
More recently, Sousa (2010) used experimental methodologies to examine the ef-
fects of small-scale changes in wealth on risk attitudes and found mixed results that
depend on the way the experiment is designed. For windfall gains in wealth, no
changes in the level of risk aversion are observed (the Constant Absolute Risk Aver-
sion or CARA property is satisfied), while for expected reward between risky tasks,
monetary gains induce individuals to take more risks (DARA). This highlights the
importance of the sources of risk and their effects on decision-making (Abdellaoui,
Baillon, Placido and Wakker, 2011).
Armantier, Foncel and Treich (2018) study both portfolio and insurance decisions
under risk to conclude that increases in wealth imply increases in risky investment
and in insurance demand. This provides support for the DARA hypothesis in port-
folio decisions but, at the same time, rejects the DARA hypothesis in insurance
decisions. Millo (2016) test if insurance is a normal good at the macro level by using
a set of 84 countries. He finds evidence that support the existence of a positive as-
sociation between insurance consumption and GDP. Finally, Chi, Zhou and Zhuang
(2020) develop a theoretical model of optimal insurance limiting the variance of the
risk exposure. They prove that under those specific conditions, the expected cover-
age increases in wealth, providing theoretical support to the possibility of insurance
to be a normal good under specific contracts.
In this paper we test the DARA hypothesis studying the annuitization decision
as a way to cope with the risk of longevity, which is the main source of financial
uncertainty for most retired people.
The decision to annuitize has been study in some depth by teh literature. For
example, from the theoretical side Yaari (1965) establishes that it is optimal for
people to fully annuitize their pension resources upon retirement if the only source
of uncertainty is the length of life. This result is based on individual assumptions
like von Neumann-Morgenstern’s expected utility maximizers, with intertemporally
separable utility, subject to exponential discounting, no bequest motives, and an-
nuities that are purchased in an actuarially fair market. Davidoff, Brown, and Dia-
mond (2005) also arrive at an optimal decision of full annuitization without bequest
motives and an actuarially fair annuity market under the Arrow-Debreu complete
market settings, which consider the rate of return for surviving investors higher than

3
for conventional investment, with comparable financial risk. However, the literature
describes the “annuity puzzle”, which consists in the empirical observation that, in
practice, most people tend to prefer not to annuitize, and the potential reasons that
explain the puzzle come from bequest motives Dus, Maurer and Mitchell (2005), ad-
verse selection problems (Brown, 2001; Brown, 2003; Finkelstein and Poterba, 2004;
McCarthy and Mitchell, 2002; Ruiz, 2014) and the health status of the decision-
maker (James, Martinez and Iglesias, 2006;Finkelstein and Poterba, 2004).
In this paper, we study the choice between an annuity and a phased withdrawal
scheme for retirement in the Chilean market. This decision is a good opportunity
to test the DARA hypothesis because if preferences are DARA, then insurance is
an inferior good. Consequently, the larger the pension fund accumulated by the
individual (as a proxy of wealth), the less likely they would be to choose an annuity
for retirement that covers the risk of longevity.
Our empirical results show that, when we consider the whole sample, at the time of
retirement individuals’ preferences exhibit IARA behavior, rejecting the traditional
assumption found in most of the insurance literature and, consequently, making
insurance a normal good. After splitting the sample into low-income and high-
income decision-makers, the former exhibit IARA behavior while the latter DARA.
This inverse-U effect of the Probit model is mainly based on a “poor-country effect”,
which means that a weak labor market generates insufficient funds to a large fraction
of people at the time of retirement. Additionally, an unsatisfactory public provision
of health care for the majority of elderly, for instance, induces many decision-makers,
especially the low-income ones, to use part –if not all– of their retirement funds for
those more urgent needs. This transforms the risk of longevity into an issue of
secondary importance for the poor. Our results highlight the importance of the
level of development of a country when analyzing policy that deals with retirement
under different instruments to cover the risk of longevity.
In the next section, we present a basic dynamic model that interprets the decision
to annuitize or to go for a phased withdrawal scheme as a retirement option. Section
3 presents our empirical estimations and finally, section 4 concludes.

4
2 The Annuitization Decision
There is important literature that shows that people tend to fail in planning for re-
tirement in terms of the accumulation of sufficient funds (Lusardi and Mitchell, 2011
and 2014; Moure, 2016). However, to ensure financial well-being during retirement,
it is also necessary to put some emphasis on how to spend those resources beyond
the accumulation phase (Brown, 2007). The longevity risk –of outliving the accu-
mulated wealth– is one of the main sources of uncertainty for people. In his seminal
paper, Yaari (1965) establishes that it is optimal for people to fully annuitize their
pension resources upon retirement if the only source of uncertainty is the length of
life. This result is based on individual assumptions like von Neumann-Morgenstern’s
expected utility maximizers, with intertemporally separable utility, subject to ex-
ponential discounting, no bequest motives, and annuities that are purchased in an
actuarially fair market. Davidoff, Brown, and Diamond (2005) also arrive at an op-
timal decision of full annuitization without bequest motives and an actuarially fair
annuity market under the Arrow-Debreu complete market settings, which consider
the rate of return for surviving investors higher than for conventional investment,
with comparable financial risk. However, the literature describes the “annuity puz-
zle”, which consists in the observation that, in practice, most people tend to prefer
not to annuitize.
Why do the majority of people decide not to voluntarily annuitize, in practice?
Many arguments, ranging from psychological to economic to intra-family reasons,
have been provided to explain this puzzle. One of the possible explanations for the
low annuity adoption rate is that people may have bequest motives and prefer to
retain the option to leave retirement funds as inheritance. On the other hand, if
individuals have no bequest motives, they will prefer to invest in higher-yielding
actuarial notes based on the annuity premium. However, studies like Brown and
Poterba (2000) and Brown (2001) find no evidence that bequest motives are a sig-
nificant factor that influence decummulation patterns of the elderly. Another vein
follows the idea of keeping resources for precautionary savings or to diversify fund-
ing sources during retirement. Mitchell and Moore (1998) found that individuals
diversify total wealth by holding private pensions, traditional assets or housing, and
Social Security, according to the Health and Retirement Survey (HRS). Mackenzie
(2006) reports that the optimal portfolio should combine annuities and precaution-
ary savings. Dus, Maurer and Mitchell (2005), using a risk-value approach, report

5
that phased withdrawal plans have the advantages of flexibility and bequest motives
but also require effort from the individual to formulate asset allocation and with-
drawal rules. Horneff, Maurer, Mitchell and Stamos (2007) find that the optimal
path is to gradually annuitize the portfolio.
Many studies have emphasized the effect of adverse selection on annuities (Brown,
2001; Brown, 2003; Finkelstein and Poterba, 2004; James, Martinez and Iglesias,
2006; McCarthy and Mitchell, 2002; Ruiz, 2014). Brown (2001) finds that health
status is a significant determinant of the annuity choice. Brown (2003) reports that
mandating annuities for all individuals will not be optimal due to the existence of
different mortality distributions across groups and differing purchase costs. Ruiz
(2014) and James, Martinez and Iglesias (2006) also report evidence of adverse
selection based on individual private information about short-run health status.
Finkelstein and Poterba (2004) find evidence that longer-lived individuals buy more
back-loaded annuities. McCarthy and Mitchell (2002) provide evidence of adverse
selection in annuities for the US, the UK and Japan by comparing the mortality
patterns, and Fong (2002) does the same for Singapore.

3 The Basic Model of Optimal Retirement

Brown (2001) developed a dynamic life-cycle model of annuitization for retirement.
In this paper, as a way to introduce the economic intuition of the problem faced by
the decision-maker, we provide a simplified version of that model, with preferences
that are represented by a lifetime utility of consumption where the decision-maker
faces a dichotomous decision: to annuitize or to go for a phase withdrawal scheme.
This dichotomous choice represents the actual alternatives existing in the Chilean
retirement market where we develop our empirical application.
Let us keep in mind that the main research question that we try to respond in this
paper is whether the annuitization decision, as an insurance decision, is consistent
with the DARA hypothesis so widely assumed in the insurance literature. If this is
the case, after controlling for all other variables that affect the decision to annuitize,
we would expect to have less annuitization and more phased withdrawal schemes as
the accumulated pension funds increase.

6
3.1 Utility for Annuity Choice

Following Brown (2001) there exists an amount of accumulated pension funds,

which we will call S65 , for the representative decision maker. This amount will
be transformed into an actuarially fair annuity A, given market conditions, and
assuming that this happens at age 65. Since the model considers real variables,
the value of the annuity is fixed in real terms over time. That is, At = A for all
t ∈ (65, ..., T ).
For the purpose of our general analysis and the following empirical exercise, it
is not relevant how the actuarially fair amount A is calculated, and therefore it is
sufficient to assume that there exists a function g : S65 −→ R+ such that g(S65 ) =
A. Now, let ρ be the discount rate, and let us define the discount factor as β =
1
∈ (0, 1). The decision maker is represented by a time-separable lifetime
(1 + ρ)
utility function for the individual who is about to retire is Tt=65 β t u(ct ) where u(·)
P

is a twice continuously differentiable, increasing and concave utility function, i.e.,

u′ (·) > 0 and u′′ (·) < 0.
To simplify the model, we will assume that the decision maker, instead of leaving
a fraction of the annuity to their heirs –which, in the Chilean case, corresponds to
60% for the wife and children–, the annuity keeps paying the complete A in case of
death of the individual. This assumption allows us to simplify the utility function of
the representative agent and to focus only on the intertemporal Euler equations that
will be presented in what follows. In Brown (2001), we can observe the separation
between own consumption and bequest motives made by the individual. However,
that separation does not allow a closed-form solution for the representative decision
maker and therefore, only simulations are presented in that seminal paper.
At time t ≥ 65 the individual budget constraint is

wt+1 = (1 + r)(wt + A − ct ) (1)

where wt is non-annuitized wealth in period t, ct is consumption in t, and (1 + r)

is the market interest rate between any two periods. This expression induces a
life-time budget constraint given by
X ct X A
t
= w65 + t
(for t ≥ 65) (2)
t
(1 + r) t
(1 + r)

The consumer problem is reduced to choose (ct , wt )Tt in order to maximize the
intertemporal utility function subject to the lifetime budget constraint for a given

7
w0 and knowing that g(S65 ) = A. Using dynamic programming to solve this problem
and using a concave value function v(wt ), this implies the following Bellman equation
   
wt+1
v(wt ; A) = M ax u wt + A − + βv(wt+1 ) (3)
{wt+1 } (1 + r)
where the first order condition is given by
 
1 ′ wt+1
− u wt + A − + βv ′ (wt+1 ) = 0 (4)
(1 + r) (1 + r)
and the envelope theorem implies
 
′ ′ wt+1
v (wt ; A) = u wt + A − (5)
(1 + r)
Then plugging (5) into (4) and rearranging terms, we get the usual dynamic equi-
librium condition
u′ (ct )
= (1 + r) (6)
βu′ (ct + 1)
This known expression tells us that, in the dynamic representative agent equilibrium,
the marginal rate of substitution must equal the market’s interest rate.

3.2 Utility for a Phased Withdrawal Scheme

The phased withdrawal scheme conserves many of the characteristics of the an-
nuity choice but it introduces the uncertainty of the recalculation of the withdrawal
amount every year. Here, market conditions and market uncertainty play an im-
portant role in what is left of the accumulated pension fund every period, after
withdrawal and in the recalculation of the payment every year. In this case, we will
assume that there exists a function f : St −→ R that translates the yearly ending
balance of the accumulated pension fund St into a withdrawal amount Lt for year t,
i.e., f (St ) = Lt . Since market conditions are random, St and Lt are also random. St
follows the inter-temporal accumulation constraint Set+1 = (St − Lt )(1 + rem ), where
rem is the random return of the stock market applied to the remaining balance of the
accumulated pension fund (the balance remains in the stock market).
This implies that the individual budget constraint now becomes

w e t − ct )
et+1 = (1 + r)(wt + L (7)

and, therefore, the lifetime budget constraint is now given by

X ct X L et
= w65 + (for t ≥ 65) (8)
t
(1 + r)t t
(1 + r) t

8
 et )T65 in order to maximize the
The consumer problem is reduced to choosing (ct , w
intertemporal utility function, subject to the lifetime budget constraint, for a given
w0 and knowing that f (St ) = Lt and Set+1 = (St − Lt )(1 + rem ).
Solving this problem using dynamic programming with a concave value function
v(wt , St ) implies the following Bellman equation:
   
wt+1
v(wt , Lt ) = M ax u wt + Lt − + βEv(w
et+1 , L
et+1 ) (9)
{wt+1 } (1 + r)

where the first order condition is

 
1 ′ wt+1
− u wt + Lt − + βEv ′ (w
et+1 , L
et+1 ) = 0 (10)
(1 + r) (1 + r)

and the envelope theorem implies

 
′ ′ wt+1
v (wt , Lt ) = u wt + Lt − (11)
(1 + r)

Then plugging (11) into (10) and rearranging terms, we obtain

u′ (ct )
= (1 + r) (12)
βEu′ (ct + 1)

Observe that in our simplified model we eliminated the longevity risk by assuming
that the representative decision maker has a bequest motive and that the heirs will
receive either the complete annuity or the complete withdrawal amount in each
period. Therefore, our simplified model only exhibits uncertainty in the phased
withdrawal scheme, since the remaining balance (St − Lt ) is reinvested in the stock
market.
From Mitchell and Ruiz (2010) and Ruiz (2014), we know that, in the Chilean
market, the probability of annuitizing instead of going for the phased withdrawal
scheme is determined by several factors, such as having better health conditions, hav-
ing more knowledge of the pension system, having more general education, marital
status and having more children. All these variables are included in our estima-
tions as controls in order to capture separately the effects of wealth on the annuity
decision.
To analyze if the annuity decision (like any other insurance decision) represents
DARA preferences of the decision maker, we will do the following comparison. Let
us think of an individual who is indifferent between choosing the annuity or a phased
withdrawal scheme. This individual will be denoted by S¯65 . If this individual chooses

9
an annuity, they receive annuity g(S¯65 ) = Ā. Alternatively, if this individual chooses
a phased withdrawal scheme, he receives f (St ) = Lt . Observe that S¯65 = S̄t at
t = 65, and from t = 1 to T we know that Set+1 = (St − Lt )(1 + rem ).
The indifferent individual is then defined by

v(wt , Ā) = v(wt , Lt ) at t = 65 (13)

which implies that

   
wt+1
M ax u wt + Ā − + βv(wt+1 , Ā) =
{wt+1 } (1 + r)
   
wt+1
M ax u wt + Lt − + βEv(w
et+1 , Lt+1 ) (14)
e
{wt+1 } (1 + r)

Then, if the indifferent decision maker has DARA preferences and faces an increase
in S, such that now S > S̄, they would prefer to go into the phased withdrawal
scheme. This choice will indirectly reflect an annuity that would behave like an
inferior good, satisfying the DARA property. That is,

v ′ (wt , Ā) < v ′ (wt , Lt ) for S > S̄ at t = 65 (15)

knowing that Ā = g(S¯65 ) and Lt = f (St ). An this case is depicted in Figure 1 below.
In the next section, we will empirically test if the annuity decreases as wealth
increases.

 ()  ( wt , Lt )

 ( wt , A)

S S

Figure 1: DARA property for S > S̄

10
4 Empirical Estimation

4.1 Data

The sample used in this research was obtained from the Social Protection Survey1
(“EPS survey”, or “Encuesta de Protección Social” in Spanish) carried out in Chile
in its 2009 version. We used this version because it was the version that included
questions related to risk aversion, asset-holding and other specific demographic in-
formation constituting necessary control variables for our empirical analysis.
Provided that decision-makers satisfy the legal requirements2 , they can decide to
retire, choosing between an annuity or a phased withdrawal scheme. The annuity
is a contract between the decision-maker and a life insurance company, in which
the latter commits to a fixed monthly payment in UF3 for the entire life of the
individual and, after death, to their beneficiaries if so arranged in the contract. On
the contrary, a phased withdrawal scheme transfers payments from the remaining
balance that the decision-maker maintains in the individual capitalization account.
In this second case, the individual bears the longevity risk if the balance goes to zero
during his lifetime. However, this second alternative presents the benefits derived
from using the accumulated fund with more flexibility and getting greater amounts
of cash at the beginning of the retirement period in, for example, paying debt,
funding a health emergency or investing in projects, if so desired. So if decision-
makers exhibit DARA preferences, it should be less likely for them to select the
annuity when faced with an increase in wealth.
Decision-makers facing the decision to retire may also have other assets such as
financial investments, real estate or an entrepreneurial venture. However, for the
vast majority of individuals, the accumulated pension fund is a good approximation
of their wealth level. In practice, decision-makers decide for a type of pension they
want and then they must be advised by the System for Consultations and Offers
of Pension Amounts4 on the alternatives available at the time of retirement, where
1
https://www.previsionsocial.gob.cl/sps/biblioteca/encuesta-de-proteccion-social
2
Decree Law No. 3,500 of 1980
3
Chilean monetary unit, readjustable according to inflation. 1UF = $ 20,942.88 = U$ 41.35 as
of December 30, 2009
4
Institution that brings together the pension alternatives offered by Pension Fund Administra-
tors (AFP) and Insurance Companies in a bid contest, from where decision-maker chooses the best
offer.

11
the accumulated pension funds (as a proxy for wealth) are the key variable to test
if DARA behavior is satisfied in practice. As a robustness check, we will also use
the total assets an individual has at the time of retirement as a second proxy for
wealth. This information was also obtained from the EPS survey.
Figure 2 shows that, for individuals in the lowest deciles of the accumulated pen-
sion fund amounts, the annuity option is less preferred. However, as the accumulated
pension funds increase, more individuals choose an annuity, suggesting the existence
of IARA behavior, at least in the low-income groups. On the contrary, in the highest
deciles, we find the opposite behavior: as wealth increases, fewer individuals are will-
ing to contract an annuity. This suggests the possibility of there being a threshold
where DARA preferences prevail after the initial existence of IARA preferences.

Figure 2: Percentage of Decision-makers that chose an annuity by wealth decile

Annuity choice and Pension Fund Annuity choice and Assets

(A) (B)
.8

.8
.6

.6
[%] Annuity Choice

[%] Annuity Choice

.4

.4
.2

.2
0

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Fund pension decil Assets decil

Source: Social Protection Survey (EPS) 2009

Note: Graph (A) presents the percentage of the sample that chose annuity (vertical axis), by
decile of the pension fund (horizontal axis), which increases concavely. Graph (B) presents the
same choice of annuity (vertical axis) per decile of accumulated assets (horizontal axis), which
shows a slight positive slope. Wealth proxies are measured in Millions of UF (UF = $ 20,942.88
(Chilean pesos) = U$ 41.35 (dollars) / December 30, 2009).

In order to test the DARA hypothesis, we have included more demographic vari-
ables as controls, such as gender, age, education, dependence on children and those
traditionally used in retirement research (Bütler and Teppa, 2007; Schreiber and
Weber, 2016; Mitchel and Ruiz, 2010 and Ruiz 2014). Observe that 18.4% (Table
1) of the sample reported a salary, therefore, we will consider it as a binary control
variable taking the value 1 if the person receives labor income and 0 if not. Since
Bütler and Teppa, (2007) include the type of work as a control variable, we use the
condition of being self-employed. In addition, these authors include the age at which
the person retired, which we modify through a binary condition that takes the value

12
1 if decision-makers retire early and 0 otherwise. Looking at the data, we observe
that 43% of the sample retired early. Finally, we include the Heritage binary vari-
able, which takes the value 1 if the decision-maker plans to leave an inheritance and
the value 0 otherwise. We observe that 60% of the sample plans to leave a heritage.

Table 1: Descriptive statistics of the sample

Mean Std Dev Median Minimum Maximum

Pension modality (Annuity = 1) 0.506 0.500 1.000 0.000 1.000
Pension funds (kUF(a)/2009) 1.924 1.895 1.318 0.000 19.100
Assets (kUF(a)/2009) 1.321 3.490 0.668 -0.473 70.138
Wealth (kUF(a)/2009) 3.244 4.555 2.137 0.000 86.851
Risk aversion (High = 1) 0.759 0.428 1.000 0.000 1.000
Early retirement (Yes = 1) 0.429 0.495 0.000 0.000 1.000
Knowledge of pension system (High = 1) 0.333 0.472 0.000 0.000 1.000
Heritage (Yes = 1) 0.600 0.490 1.000 0.000 1.000
Self-employed (Yes = 1) 0.144 0.352 0.000 0.000 1.000
Gender (Male = 1) 0.667 0.472 1.000 0.000 1.000
Age (Years) 66.557 5.605 67.000 50.000 82.000
Years of schooling 8.319 4.458 8.000 0.000 24.000
Perceived state of health (Bad = 1 to Good = 4) 2.465 0.784 3.000 1.000 4.000
Marital status (Married = 1) 0.606 0.489 1.000 0.000 1.000
Head of household (Yes = 1) 0.849 0.358 1.000 0.000 1.000
Labor income (Yes = 1) 0.184 0.388 0.000 0.000 1.000
Children (Yes = 1) 0.694 0.461 1.000 0.000 1.000
Children over 18 y.o. (Yes = 1) 0.644 0.479 1.000 0.000 1.000
Source: Social Protection Survey (EPS) 2009
Wealth = Pension funds + Assets. (a) Thousands of Fomento Units (UF = U$ 41.35; December 30, 2009)

4.2 Empirical Strategy

The problem of choosing an annuity is empirically represented with a discrete

choice model as described in equation (16), where the endogenous variable is the
decision to annuitize at the time of retirement, S represents the accumulated pen-
sion fund (or the alternative proxy for wealth used in the robustness exercise), X
represents a vector of the control variables of the model detailed in Table 1. We will
assume that errors follow a standard normal distribution.

Pr(Annuity = 1|S, X) = Φ β0 + β1 · S + β2 · S 2 + X · β


(16)

From (16), we will obtain the marginal effects in the model using a Probit model.
We will include a quadratic version of S as an explanatory variable, as seen in
equation (17).

13
 ∂Pr(Annuity = 1|S, X)
= ϕ β0 + β1 · S + β2 · S 2 + X · β · (β1 + 2 · β2 · S) (17)


∂S
In principle, for the DARA hypothesis to be confirmed, we should have a negative
and statistically significant β1 . In this case, the quadratic component associated with
β2 should not be statistically significant nor particularly important as a weighting
factor for the final effect on the decision to annuitize. On the contrary, if the
quadratic component has an opposite sign to β1 and is statistically significant, it
indicates the possibility of a change in the slope of the Probit model as S increases.
We theorize that, given the insufficient levels of savings5 that many decision-
makers are faced with at the age of retirement, people with a small pension fund
(and wealth) are very unlikely to contract an annuity to cover longevity risk. Since
they have more urgent needs to respond to in the short run, a phased withdrawal
scheme may be a better decision for them. In consequence, we expect to find an
inverse-U shape for the Probit estimation. That is, passing a certain threshold of
accumulated pension funds (wealth), we expect to have DARA preferences where
an annuity (insurance) represents an inferior good. Therefore, the greater the accu-
mulated pension fund, the less likely for the decision-maker to contract an annuity.
However, below a certain threshold of accumulated pension funds (i.e., for the group
of low-income individuals) we expect to find the opposite IARA behavior. In this
case, urgent needs are greater for poor people and, therefore, the smaller the ac-
cumulated pension fund, the less likely it is to result in an annuity contract. This
inverse-U shape of the Probit model is mainly induced by poverty, i.e., insufficient
funds to retire covering the risk of longevity when urgent needs at the age of retire-
ment are not satisfied. We call this the “poor-country inverse-U wealth effect” or
simply, the “poor-country effect”.

4.3 Main Results

Estimations of the marginal effects for the model described in equation (16) are
presented in Table 2. We observe that, for the whole sample, the variable pension
5
The mandatory saving-for-retirement scheme in Chile requires saving 10% of monthly income
(with a cap). However, given labor market considerations for this developing country, where many
workers have low salaries and several periods of unemployment without pension fund contributions,
this directly harms the accumulated pension fund.

14
fund is positive and statistically significant. Therefore, preferences seem to satisfy
the IARA assumption and the annuity seems to be a normal good in the whole
sample. This initially surprising result contradicts the usual DARA assumption
found in most economic models that deal with uncertainty. However, this result is
not unique in the empirical insurance literature (Eisenhauer (1997), Sousa (2010),
Armantier et al. (2018)).

15
 Table 2: Marginal effects of the choice of annuity.

VARIABLES Pension fund Assets Wealth Standard

Pension funds [kUF(a)/2009] 0.0594** 0.0587**

[2.4826] [2.4695]
Pension funds squared -0.0049*** -0.0047**
[-2.6781] [-2.4954]
Assets [kUF(a)/2009] 0.0084 -0.0040
[0.7228] [-0.7497]
Assets squared -0.0004
[-1.3198]
Wealth [kUF(a)/2009] 0.0272*
[1.7288]
Wealth squared -0.0013
[-1.5570]
Risk aversion [High = 1] 0.0537 0.0457 0.0515 0.0524
[1.2167] [1.0325] [1.1594] [1.1869]
Early retirement [Yes =1] 0.1545*** 0.1726*** 0.1660*** 0.1539***
[3.5932] [4.0959] [3.9220] [3.5822]
Knowledge of pension system [High = 1] 0.0794* 0.0760* 0.0753* 0.0801*
[1.9062] [1.8194] [1.8083] [1.9229]
Heritage [Yes = 1] 0.0964** 0.0978** 0.0944** 0.0965**
[2.3417] [2.3647] [2.2827] [2.3465]
Self-employed [Yes = 1] -0.0709 -0.0840 -0.0836 -0.0668
[-1.2725] [-1.4851] [-1.4925] [-1.2015]
Marginal effect (wealth proxy) 0.0405*** 0.0074 0.0185* 0.0407**
[2.2458] [0.6664] [1.6823] [2.274]
Observations 630 630 630 630
Pseudo R2 0.117 0.112 0.115 0.117
Demographic variables YES YES YES YES

Note: The dependent variable is binary and takes the value 1 when an annuity was chosen and
the value 0 otherwise. The columns show the marginal effects of the Probit estimate. The column
“Pension funds” represents what was used as the proxy for wealth, as with the column “Assets”
where the proxy for wealth is the person’s assets. In the column “Wealth” is the accumulated sum
of the pension fund and assets. The last column considers the pension fund (as proxy for wealth
and assets) as a control variable. Common demographic controls are included for pension studies
(see Annex), in addition to risk aversion, pension anticipation, and heritage. The row “Marginal
effect” is the change in the probability of choosing an annuity as the wealth proxy increases from
the average level. (a) Thousands of UF (UF = U$ 41.35 (dollars) / December 30, 2009. *, **, and
*** indicate statistical significance at the 10%, 5%, 1% levels, respectively. Z-score in brackets.
Source: Social Protection Survey (EPS) 2009, Chile.

We also observe that, no matter which proxy we use for wealth, the variable
“Pension funds squared” is negative and statistically significant. This opens up the

16
possibility to have an inverse-U shape for the Probit model, in which the initial
IARA behavior for low levels of wealth gives birth to a DARA behavior after a
certain threshold.
Regarding the other controls that are statistically significant, we note that more
years of schooling increases the probability of contracting an annuity, something
that highlights the importance of having a minimum degree of education to really
understand the risk of longevity and the pension fund system. Early retirement also
increases the probability of choosing an annuity and the intuition of this result is
very simple: the younger someone retires, the greater the longevity risk they face
and, therefore, the decision-maker is more prone to insure against this higher risk.
The intention to leave heritage also increases the probability of choosing an annuity.
At first sight, this result seems contradictory because a phased withdrawal scheme
provides more flexibility for bequest motives. However, in Chile most people do not
achieve an accumulated pension fund substantial enough to think of as a tool to
optimize bequest considerations. As in any other part of the world, the wealthy in
Chile use different asset classes (that are tax optimized) to organize wealth transfers
to the next generations. Therefore, since an annuity contract may only leave a
fraction of the annuity to heirs, corresponding to 60% for the wife and children (if
contracted at the time of retirement), an annuity can be seen as a mechanism to
provide a partial inheritance, but only for decision-makers with larger accumulated
pension funds.
Finally, having young children reduces the probability of contracting an annuity
since, in this case, it is very likely that the decision-maker cares more about dis-
posable funds for purposes other than covering longevity risk. However, if those
children are older than 18, the decision-maker seems to care more about their own
longevity risk, as the marginal effect suggests.
As we saw in the previous paragraph, the expected economic intuition was con-
firmed with statistically significant controls and, therefore, the only strange result
comes from the wealth effect of the Probit model. In what follows, we split the
sample into a low-income/high-income gradient for three different percentile distri-
butions. This robustness exercise provides us with the main result of this paper,
which is that preferences for the low-income population exhibit IARA behavior while
for the high-income population exhibit DARA behavior. Therefore, what we really
find in the Chilean case is a poor-country inverse-U wealth effect.

17
 Figure 3 provides a graphical intuition of the importance of the quadratic effect
of wealth in our estimations. We observe a positive but decreasing marginal effect
below a certain threshold of an accumulated pension funds (which, in this case,
is around UF 6,000, used as a proxy for wealth) and a negative marginal effect
above it. Therefore, even though we do not care about the exact number that the
threshold represents, we can still see that splitting the sample should capture IARA
preferences for low levels of wealth and DARA preferences for high levels of wealth.

Figure 3: Marginal effects of annuity choice by pension fund.

.1 .05
Marginal effect [%]
0

1.924, Mean pension fund

-.05
-.1

0 2 4 6 8 10
Pension fund [MUF/2009]

Note: The vertical axis shows the marginal effect on the annuity choice probability as a percent-
age, while the horizontal axis shows pension funds as a proxy of wealth. The reference point is
the average pension fund, marked with a vertical line close to 2 thousand UF. The dotted line
corresponds to the marginal effects of the probability of choosing an annuity as the pension funds
increase, while the parallel lines that surround it mark the 95 % confidence interval. The linear
decrease of the marginal effect marks a concave relationship between the annuity choice and the
pension funds, reaching a maximum at 6 thousand UF (UF = U$ 41.35 (dollars) / December 30,
2009).

In Table 3 we show the results after splitting the sample into the low-income/high-
income gradients. Three partitions on the wealth variable are provided: 30/70, 50/50
and 70/30. We observe that the inverse-U shape conjecture is confirmed. For the
three partition cases, the sign of the marginal effects are the correct ones. However,
only in the 50/50 case are the accumulated pension fund results statistically signifi-
cant for both the low-income and the high-income decision-makers. The statistically
significant control variables behave as expected in most cases. We lose statistical

18
power in some cases but the expected signs of the variables suggest the existence of
a threshold, and so the inverse-U shape or the IARA-DARA changing behavior is
confirmed.

19
 Table 3: Marginal effects of annuity by pension fund percentile.

(A) (B) (C)

VARIABLES 30% 70% 50% 50% 70% 30%

Pension funds [kUF(a)/2009] 0.2612* -0.0192 0.1997** -0.0307** 0.2216*** -0.0216

[1.7727] [-1.4822] [2.0071] [-2.4599] [3.6561] [-1.4347]
Risk aversion [High = 1] 0.0113 0.0700 -0.0137 0.0916 0.0238 0.0792
[0.1467] [1.3538] [-0.2176] [1.5735] [0.4640] [0.9983]
Early retirement [Yes =1] 0.2241*** 0.0756 0.1667** 0.0622 0.1481*** 0.0288
[2.9114] [1.4331] [2.5190] [1.0031] [2.8034] [0.3392]
Knowledge of pension system [High = 1] 0.0989 0.0602 0.0601 0.0655 0.1187** -0.0132
[1.3107] [1.2584] [1.0058] [1.1412] [2.4718] [-0.1713]
Heritage [Yes = 1] 0.1812** 0.0681 0.0964* 0.0875 0.1136** 0.0687
[2.5690] [1.3946] [1.7296] [1.4679] [2.4895] [0.8212]
Self-employed [Yes = 1] 0.0185 -0.0783 -0.0830 -0.0278 -0.1043 0.0530
[0.2260] [-1.0911] [-1.0686] [-0.3475] [-1.6233] [0.4879]
Gender [Male = 1] -0.0186 0.1328** 0.1185 0.0846 0.1240** 0.0332
[-0.1880] [2.0985] [1.4872] [1.0794] [2.0064] [0.3023]
Age [Year] 0.0107 0.0065 0.0106* 0.0048 0.0101** 0.0044
[1.3495] [1.4503] [1.7531] [0.8899] [2.1182] [0.5757]
Years of schooling 0.0088 0.0259*** 0.0147** 0.0225*** 0.0186*** 0.0178*
[1.0224] [4.5978] [2.2575] [3.1773] [3.3742] [1.8408]
Perceived state of health [Bad = 1 to Good = 4] 0.0044 0.0162 -0.0074 0.0166 -0.0105 0.0209
[0.1066] [0.5504] [-0.2166] [0.4827] [-0.3709] [0.4621]
Marital status [Married = 1] -0.0614 0.1884*** 0.0311 0.1737*** 0.0710 0.1503*
[-0.8912] [3.5508] [0.5564] [2.6342] [1.4590] [1.6945]
Head of household [Yes = 1] -0.0531 0.0923 -0.0261 0.1013 0.0126 0.1014
[-0.4910] [1.3332] [-0.3178] [1.1830] [0.1891] [0.8354]
Labor income [Yes = 1] 0.0045 -0.0335 -0.0694 0.0151 -0.0869 0.1247
[0.0517] [-0.5766] [-0.9149] [0.2205] [-1.3757] [1.5459]
Children [Yes = 1] 0.0506 -0.3752*** -0.0221 -0.4266*** -0.1146 -0.3920**
[0.3567] [-3.5276] [-0.1635] [-3.5646] [-0.9999] [-2.3403]
Children over 18 y.o. [Yes = 1] 0.0989 0.2411** 0.0758 0.2626** 0.1025 0.2490*
[0.7201] [2.4492] [0.5715] [2.4530] [0.9270] [1.6707]
Observations 188 442 315 315 441 189

Note: The binary dependent variable takes the value 1 when annuity was chosen and the value 0
otherwise. The columns show the marginal effects of the Probit estimate using the pension fund
as a wealth proxy. Column (A) splits the sample into the bottom 30% and the top 70% of the
pension funds. Column (B) splits the sample into the lower 50% and the top 50% of the pension
funds. Column (C) splits the sample into the bottom 70% and the top 30% of the pension funds.
Common demographic controls are included for pension studies (see Annex), in addition to risk
aversion, pension anticipation, and inheritance. The pension fund is considered linearly, evaluating
its change in significance in relation to how the cutoff of the percentile moves. (a) Thousands of
UF (UF = U$ 41.35 (dollars) / December 30, 2009). * , **, and *** indicate statistical significance
at the 10 %, 5 %, 1 % levels, respectively. Z-score in brackets. Source: Social Protection Survey
(EPS) 2009, Chile.

20
5 Conclusions
We have tested the DARA hypothesis using data from the Chilean pension market.
In particular, we have studied the choice between an annuity and a phased with-
drawal at the time of retirement. Traditionally, economic theory assumes DARA
preferences, and these preferences imply that insurance is an inferior good and,
therefore, the wealthier a decision-maker is, the less likely he is to choose an annuity
instead of a phased withdrawal scheme. Our results partially refute such assumption.
We estimated the probability of choosing an annuity as a function of the accumu-
lated pension fund, and the latter as a proxy for wealth. Controlling for traditional
demographics used in the annuity selection literature, we found that, in the sample
as a whole, decision-makers exhibit IARA preferences, refuting expected results in
this insurance market. Then, splitting the sample into two groups (high-income and
low-income), we observe that low-income decision-makers exhibit IARA behavior
while high-income individuals exhibit DARA behavior. This produces an inverse-
U shape of the Probit model that is explained by what we call the “poor-country
effect”.
The poor-country effect recognizes that in this developing country, for many
decision-makers, the funds accumulated by the average individual are not enough
to fund retirement and, therefore, the risk of longevity cannot be covered with such
insufficient funds. The Chilean fully-funded system has been great for people with
high-income and few, short unemployment periods during most of the active years
in the labor market. However, a weak labor market for low-income individuals, as
well as a low contribution rate (only 10% of the monthly income, capped) makes
it impossible to secure sufficient funds for retirement, despite the good historical
performance of pension fund managers in terms of rates of return achieved in the
past.
A second aspect of this poor-country effect implies that this developing coun-
try does not provide good public provision of minimum conditions (in health care
for example) for retired individuals. As a result, they must often use the accu-
mulated pension fund to finance more urgent consumption needs in the short run
or for health-related expenditures. On the other hand, in the high-income group,
the DARA behavior mimics what is expected for a developed country where these
economic theories of choice under risk are developed. In consequence, we found two

21
very different types of responses for individuals facing wealth increases at the time
of retirement, mainly depending on wealth level.
Policies that promote saving through tax benefits and direct subsidies on the
rate of return seem to be important. Good macroeconomic conditions and low
unemployment rates seem to be even more important, given the incidence that
a weak labor market has on the accumulation of a fully funded pension fund for
retirement. Essentially, the “anomaly” of IARA behavior reflects nothing more
than a poor-country effect that exposes poverty conditions among the elderly.

22
References
[1] Abdellaoui, M., Baillon, A., Placido, L., and Wakker, P. (2011). The rich do-
main of uncertainty: Source functions and their experimental implementation.
American Economic Review, 101 (2), 695-723.

[2] Armantier, O., J. Foncel and Treich, N. (2018). Insurance and Portfolio Deci-
sions: A Wealth Effect Puzzle. Working Paper Toulouse School of Economics.

[3] Arrow, K. (1971). Essays in The Theory of Risk Bearing. Chicago: Markham
Publishing.

[4] Arrow, K. and Priebsch, M. (2014). Bliss, Catastrophe, and Rational Policy.
Environmental Resources Economics, 58, 491-509.

[5] Bonilla C. and Vergara, M. (2013). Credit Rationing or Entrepreneurial Risk

Aversion? A Comment Economics Letters, 120(2), 329 - 331.

[6] Brown, J. R. (2001). Private pensions, mortality risk, and the decision to annu-
itize. Journal of Public Economics, 82(1), 29-62.

[7] Brown, J. R. (2003). Redistribution and insurance: Mandatory annuitization

with mortality heterogeneity. Journal of Risk and Insurance, 70(1), 17-41.

[8] Brown, J. R. (2007). Rational and behavioral perspectives on the role of annuities
in retirement planning (No. w13537). National Bureau of Economic Research.

[9] Brown, J. R. and Poterba, J.M. (2000), Joint Life Annuities and Annuity De-
mand by Married Couples. Journal of Risk and Insurance, 67(4), 527-553.

[10] Bütler, M., and Teppa, F. (2007). The choice between an annuity and a lump
sum: Results from Swiss pension funds. Journal of Public Economics, 91(10),
1944-1966.

[11] Chi, Y., Zhou, X. and Zhuang, S. (2020). Variance Contracts. Available at
SSRN: https://ssrn.com/abstract=3656850.

[12] Cressy, R. (2000). Credit rationing or entrepreneurial risk aversion? An al-

ternative explanation for the Evans and Jovanovic finding. Economics Letters,
66(2), 235-240.

23
[13] Davidoff, T., Brown, J. R., and Diamond, P. A. (2005). Annuities and individual
welfare. American Economic Review, 95(5), 1573-1590.

[14] Dus, I., Maurer, R., and Mitchell, O. S. (2005). Betting on death and capital
markets in retirement: a shortfall risk analysis of life annuities (No. w11271).
National Bureau of Economic Research.

[15] Eisenhauer, J.G. (1997). Risk aversion, wealth, and the DARA hypothesis: A
new test. International Advances in Economic Research, 3(1), 46-53.

[16] Eisenhauer J.G. and Halek M. (1999) Prudence, risk aversion, and the demand
for life insurance. Applied Economics Letters, 6(4), 239-242.

[17] Finkelstein, A., and Poterba, J. (2004). Adverse Selection in Insurance Mar-
kets: Policyholder Evidence from the U.K. Annuity Market. Journal of Political
Economy, 112, 183-208

[18] Fong, W. M. (2002). On the cost of adverse selection in individual annuity

markets: evidence from Singapore. Journal of Risk and Insurance, 69(2), 193-
208.

[19] Guiso, L; T. Jappelli and D. Terlizzese (1996). Income Risk, Borrowing Con-
straints, and Portfolio Choice. American Economic Review, 86(1), 158-172.

[20] Hvide, H. K. and Panos, G. A. (2014). Risk tolerance and entrepreneurship.

Journal of Financial Economics, 111(1), 200-223.

[21] Horneff, W. J., Maurer, R. H., Mitchell, O. S., and Stamos, M. Z. (2007).
Money in motion: Dynamic portfolio choice in retirement (No. w12942). National
Bureau of Economic Research.

[22] James, E., Martinez, G., and Iglesias, A. (2006). The payout stage in Chile:
who annuitizes and why? Journal of Pension Economics and Finance, 5(2),
121-154.

[23] Levy, H. (1994). Absolute and relative risk aversion: An experimental study.
Journal of Risk and Uncertainty, 8(3), 289-307.

[24] Lusardi, A., and Mitchell, O. S. (2011). Financial literacy and retirement plan-
ning in the United States. Journal of Pension Economics and Finance, 10(4),
509-525.

24
[25] Lusardi, A., and Mitchell, O. S. (2014). The economic importance of financial
literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44.

[26] McCarthy, D. and O. Mitchell (2002). Estimating International Adverse Selec-

tion in Annuities. North American Actuarial Journal 6(4), 38-54.

[27] Mackenzie, G. A. S. (2006). Annuity markets and pension reform. Cambridge

University Press.

[28] Millo G. (2016). The Income Elasticity of NonLife Insurance: A Reassessment.

Journal of Risk and Insurance, 83(2), 335-361.

[29] Mitchell, O. S., and Moore, J. F. (1998). Can Americans afford to retire? New
evidence on retirement saving adequacy. Journal of Risk and Insurance, 65(3),
371-400.

[30] Mitchell, O. S., and J.Ruiz. (2010). Pension Payouts in Chile: Past, Present,
and Future Prospects. In Securing Lifelong Retirement Income Global Annuity
Markets and Policy. (Eds) O. Mitchell, J. Piggott, and N. Takayama. Oxford
University Press.

[31] Moure, N. G. (2016). Financial literacy and retirement planning in Chile. Jour-
nal of Pension Economics and Finance, 15(2), 203-223.

[32] Ogaki, M and Q. Shang. (2001). Decreasing relative risk aversion and tests of
risk sharing. Econometrica, 69(2), 515-526

[33] Ruiz, J. L. (2014). Annuity Choices in Chile: A Dynamic Approach. Emerging

Markets Finance and Trade, 50(5), 6-21.

[34] Sousa, S. (2010). Small-Scale Changes in Wealth and Attitudes Towards Risk
(No. 2010-11). CeDEx Discussion Paper Series.

[35] Schreiber, P. and M. Weber. (2016). Time inconsistent preferences and the
annuitization decision. Journal of Economic Behavior & organization, 129, 37-
55.

[36] Yaari, M. E. (1965). Uncertain lifetime, life insurance, and the theory of the
consumer. The Review of Economic Studies, 32(2), 137-150.

25
26
5.1 Appendix

Table 4: Probit estimate of annuity by pension fund percentile.

VARIABLES Pension fund Assets Wealth Standard

Pension funds [kUF(a)/2009] 0.1701** 0.1681**
[2.4411] [2.4304]
Pension funds squared -0.0140*** -0.0134**
[-2.6289] [-2.4577]
Assets [kUF(a)/2009] 0.0240 -0.0115
[0.7224] [-0.7492]
Assets squared -0.0011
[-1.3186]
Wealth [kUF(a)/2009] 0.0777*
[1.7180]
Wealth squared -0.0038
[-1.5499]
Risk aversion [High = 1] 0.1538 0.1301 0.1471 0.1501
[1.2147] [1.0315] [1.1577] [1.1851]
Early retirement [Yes =1] 0.4426*** 0.4917*** 0.4747*** 0.4411***
[3.4854] [3.9408] [3.7870] [3.4744]
Knowledge of pension system [High = 1] 0.2274* 0.2165* 0.2154* 0.2294*
[1.8907] [1.8061] [1.7946] [1.9067]
Heritage [Yes = 1] 0.2761** 0.2785** 0.2700** 0.2766**
[2.3139] [2.3354] [2.2571] [2.3186]
Self-employed [Yes = 1] -0.2031 -0.2393 -0.2390 -0.1915
[-1.2662] [-1.4761] [-1.4827] [-1.1958]
Gender [Male = 1] 0.2066 0.1670 0.1846 0.2065
[1.3568] [1.1077] [1.2193] [1.3542]
Age [Year] 0.0241** 0.0196* 0.0207* 0.0243**
[2.0646] [1.6886] [1.7868] [2.0824]
Years of schooling 0.0553*** 0.0606*** 0.0548*** 0.0563***
[3.8223] [4.2925] [3.7300] [3.8735]
Perceived state of health [Bad = 1 to Good = 4] 0.0027 0.0063 0.0014 0.0047
[0.0388] [0.0889] [0.0191] [0.0668]
Marital status [Married = 1] 0.2852** 0.2862** 0.2740** 0.2905**
[2.2431] [2.2576] [2.1550] [2.2820]
Head of household [Yes = 1] 0.1293 0.1434 0.1442 0.1290
[0.7647] [0.8501] [0.8554] [0.7615]
Labor income [Yes = 1] -0.1000 -0.0967 -0.1008 -0.0939
[-0.7108] [-0.6846] [-0.7131] [-0.6642]
Children [Yes = 1] -0.6710** -0.6561** -0.6342** -0.6724**
[-2.4029] [-2.3815] [-2.2690] [-2.4011]
Children over 18 y.o. [Yes = 1] 0.5824** 0.5970** 0.5684** 0.5881**
[2.2419] [2.3257] [2.1748] [2.2526]
Constant -3.1147*** -2.6602*** -2.8205*** -3.1310***
[-3.5696] [-3.1023] [-3.2817] [-3.5980]
Observations 630 630 630 630
Receiver Operating Characteristic - ROC 0.7246 0.7179 0.7206 0.7246

Note: (a) Thousands of UF (UF = U$ 41.35 (dollars) / December 30, 2009). *, **, and *** indicate statistical
significance at the 10 %, 5 %, 1 % levels, respectively. Z-score in brackets. Source: Social Protection Survey (EPS)
2009, Chile.
27
 Table 5: Marginal effects of annuity choice probability.

VARIABLES Pension fund Assets Wealth Standard

Pension funds [kUF(a)/2009] 0.0594** 0.0587**

[2.4826] [2.4695]
Pension funds squared -0.0049*** -0.0047**
[-2.6781] [-2.4954]
Assets [kUF(a)/2009] 0.0084 -0.0040
[0.7228] [-0.7497]
Assets squared -0.0004
[-1.3198]
Wealth [kUF(a)/2009] 0.0272*
[1.7288]
Wealth squared -0.0013
[-1.5570]
Risk aversion [High = 1] 0.0537 0.0457 0.0515 0.0524
[1.2167] [1.0325] [1.1594] [1.1869]
Early retirement [Yes =1] 0.1545*** 0.1726*** 0.1660*** 0.1539***
[3.5932] [4.0959] [3.9220] [3.5822]
Knowledge of pension system [High = 1] 0.0794* 0.0760* 0.0753* 0.0801*
[1.9062] [1.8194] [1.8083] [1.9229]
Heritage [Yes = 1] 0.0964** 0.0978** 0.0944** 0.0965**
[2.3417] [2.3647] [2.2827] [2.3465]
Self-employed [Yes = 1] -0.0709 -0.0840 -0.0836 -0.0668
[-1.2725] [-1.4851] [-1.4925] [-1.2015]
Gender [Male = 1] 0.0721 0.0586 0.0646 0.0720
[1.3623] [1.1106] [1.2234] [1.3596]
Age [Year] 0.0084** 0.0069* 0.0072* 0.0085**
[2.0838] [1.6982] [1.7977] [2.1014]
Years of schooling 0.0193*** 0.0213*** 0.0192*** 0.0196***
[3.9494] [4.4835] [3.8496] [4.0052]
Perceived state of health [Bad = 1 to Good = 4] 0.0010 0.0022 0.0005 0.0016
[0.0388] [0.0889] [0.0191] [0.0668]
Marital status [Married = 1] 0.0995** 0.1005** 0.0958** 0.1013**
[2.2703] [2.2860] [2.1785] [2.3101]
Head of household [Yes = 1] 0.0451 0.0503 0.0504 0.0450
[0.7658] [0.8514] [0.8567] [0.7626]
Labor income [Yes = 1] -0.0349 -0.0340 -0.0352 -0.0327
[-0.7118] [-0.6852] [-0.7140] [-0.6650]
Children [Yes = 1] -0.2343** -0.2304** -0.2218** -0.2346**
[-2.4403] [-2.4167] [-2.2994] [-2.4385]
Children over 18 y.o. [Yes = 1] 0.2033** 0.2096** 0.1988** 0.2052**
[2.2696] [2.3562] [2.1999] [2.2809]
Marginal effect (wealth proxy) 0.0405*** 0.0074 0.0185* 0.0407**
[2.2458] [0.6664] [1.6823] [2.274]
Observations 630 630 630 630
Pseudo R2 0.117 0.112 0.115 0.117

Note: (a) Thousands of UF (UF = U$ 41.35 (dollars) / December 30, 2009). *, **, and *** indicate statistical
significance at the 10 %, 5 %, 1 % levels, respectively. Z-score in brackets. Source: Social Protection Survey (EPS)
2009, Chile.

28
 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
(1) Pension funds (kUF(a)/2009) 1.000
(2) Assets (kUF(a)/2009) 0.376 1.000
(3) Wealth (kUF(a)/2009) 0.704 0.923 1.000
(4) Gender -0.020 0.030 0.014 1.000
(5) Age -0.192 -0.063 -0.129 0.038 1.000
(6) Years of schooling 0.409 0.236 0.351 -0.175 -0.251 1.000
(7) Perceived state of health 0.142 0.113 0.145 0.011 -0.129 0.237 1.000
(8) Risk aversion -0.110 -0.093 -0.117 -0.115 0.071 -0.060 -0.044 1.000
(9) Children 0.014 0.030 0.029 0.056 -0.215 -0.001 -0.027 -0.005 1.000

29
(10) Children over 18 y.o. -0.009 0.031 0.020 0.002 -0.100 -0.032 -0.050 0.023 0.895 1.000
(11) Marital status 0.091 0.103 0.117 0.347 -0.094 0.065 -0.040 -0.075 0.219 0.189 1.000
(12) Head of household 0.004 0.011 0.010 0.464 0.063 -0.095 0.046 -0.051 0.086 0.048 -0.049 1.000
(13) Early retirement 0.196 0.051 0.121 0.313 -0.369 0.103 0.010 -0.014 0.144 0.067 0.212 0.141 1.000
(14) Labor income 0.140 0.132 0.159 0.049 -0.147 0.222 0.152 -0.019 -0.066 -0.066 0.006 0.063 0.069 1.000
Table 6: Correlation matrix.

(15) Knowledge of pension system 0.164 0.114 0.156 -0.007 -0.273 0.253 0.130 -0.018 0.010 -0.023 0.053 -0.022 0.116 0.168 1.000
(16) Self-employed 0.000 0.112 0.086 0.128 -0.085 0.036 0.113 -0.148 -0.031 -0.063 0.035 0.110 0.055 -0.044 0.006 1.000
(17) Heritage 0.133 0.084 0.119 0.330 -0.143 0.146 0.067 -0.051 0.139 0.104 0.337 0.181 0.262 0.062 0.158 0.041 1.000
Note: (a) Thousands of UF (UF = U$ 41.35 (dollars) / December 30, 2009)
Source: Social Protection Survey (EPS) 2009