Inattention to Rare Events

Bartosz Maćkowiak and Mirko Wiederholt ()

No 8626, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Why were people so unprepared for the global financial crisis, the European debt crisis, and the Fukushima nuclear accident? To address this question, we study a model in which agents make state-contingent plans - think about actions in different contingencies - subject to the constraint that agents can process only a limited amount of information. The model predicts that agents are unprepared in a state when the state has a low probability, the optimal action in that state is uncorrelated with the optimal action in normal times, and actions are strategic complements. We then compare the equilibrium allocation of attention to the efficient allocation of attention. We characterize analytically the conditions under which society would be better off if agents thought more carefully about optimal actions in rare events.

Keywords: Disasters; Efficiency; Rare events; Rational inattention (search for similar items in EconPapers)
JEL-codes: D83 E58 E60 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cba and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Inattention to rare events (2015)
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