“Life-Cycle Risk-Taking with Personal Disaster Risk”

by Fabio C. Bagliano, Carolina Fugazza, Giovanna Nicodano; CeRP WP N. 205/21

Inspired by a growing body of empirical work, this paper models a non-linear labour income process allowing for a personal disaster, such as long-term unemployment or disability, during working years. Such a disaster entails an uncertain but potentially large permanent shock to earnings. Personal disaster risk allows to match the flat investment profile in age, which is observed in the United States, when the calibration of both the disaster probability and the expected permanent loss in the disaster state is conservative.

Published: February 2021