Life-cycle modelling of bequests and its implications for annuity valuation

In this paper we introduce a linear bequest motive into a standard life-cycle model, both
allowing for credit and annuity market imperfections. First, we characterize the consumption
and wealth processes.We find that consumption is non-increasing in the linear bequest
parameter for the simplest certainty case, but that the same is not true for life-span
uncertainty. Second, we study the issue of annuity valuation. For a sufficiently strong
bequest motive, the true value of an annuity is equal to the actuarial value. This invalidates
a previous claim that, for imperfect annuity markets, it is close to the simple financial value.