Tiu, Cristian; Yoeli, Uzi - In: Review of Financial Studies 26 (2013) 11, pp. 2916-2960
We develop a parsimonious model in which frictions in the labor market may turn small, continuous labor productivity declines into large drops in employment, endogenously causing disasters. Assuming one state variable and CRRA agents, we solve for prices in closed form, calibrate the model using...