A1339
Title: Optimal consumption and investment decisions with disastrous income risk
Authors: Seyoung Park - University of Nottingham (United Kingdom) [presenting]
Abstract: An analytically tractable dynamic model of optimal consumption and investment decisions is developed with disastrous income risk in the context of Rietz's rare disaster risk hypothesis. The relations among consumption changes, aggregate income, disaster shock severity, and fiscal measures are first empirically explored in 55 countries during the COVID-19 period. Then, by empirical motivation, an important role of insurance is investigated with a focus on the recovery of income in a disaster. It highlights how the extent of disastrous income risk to which an agent is exposed and her income recovery post-disaster jointly affect the agent's optimal decisions. Overall, the availability of insurance can be particularly important for both the poor and the wealthy in the sense that they could even consume more, save less, and invest more post-disaster as long as their future income is (partly) recovered.
