Working Paper: CEPR ID: DP16234
Authors: Giovanna Nicodano; Fabio Cesare Bagliano; Carolina Fugazza
Abstract: This paper examines households' self-insurance in financial markets when a rare personal disaster, such as disability or long-term unemployment, may occur during working years. Personal disaster risk alters lifetime ex-ante investment choices, even if most workers will not experience a disaster. Uncertainty about the size of human capital losses, which characterizes rare disasters, results in lower risk-taking at the beginning of working life, and is crucial in order to match the observed age profiles of US investors from 1992 to 2016.
Keywords: disaster risk; portfolio choice; nonlinear income process; beta distribution
JEL Codes: D15; E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| personal disaster risk (H84) | lower risk-taking (G41) |
| uncertainty about human capital losses (J17) | lower risk-taking (G41) |
| personal disaster risk (H84) | uncertainty about human capital losses (J17) |
| personal disaster risk (H84) | lifetime ex-ante investment choices (G11) |