Discussion Paper Details

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Title: How do People Respond to Small Probability Events with Large, Negative Consequences?

Author(s): Martin Eichenbaum, Miguel Godinho de Matos, Francisco Lima, Sérgio Rebelo and Mathias Trabandt

Publication Date: October 2020

Keyword(s): COVID-19 and risk

Programme Area(s): Macroeconomics and Growth

Abstract: We study how people react to small probability events with large negative consequences using the outbreak of the COVID-19 epidemic as a natural experiment. Our analysis is based on a unique administrative data set with anonymized monthly expenditures at the individual level. We find that older consumers reduced their spending by more than younger consumers in a way that mirrors the age dependency in COVID-19 case-fatality rates. This differential expenditure reduction is much more prominent for high-contact goods than for low-contact goods and more pronounced in periods with high COVID-19 cases. Our results are consistent with the hypothesis that people react to the risk of contracting COVID-19 in a way that is consistent with a canonical model of risk taking.

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Bibliographic Reference

Eichenbaum, M, Godinho de Matos, M, Lima, F, Rebelo, S and Trabandt, M. 2020. 'How do People Respond to Small Probability Events with Large, Negative Consequences?'. London, Centre for Economic Policy Research.