Abstract
Inspired by a growing body of empirical work, this paper models a non-linear labor 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 moderate risk-taking of young investors and a flat investment profile in age, observed in the United States, when the calibration of both the disaster probability and the expected permanent loss in the disaster state is conservative.
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