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Title: Inattention to Rare Events

Author(s): Bartosz Adam Mackowiak and Mirko Wiederholt

Publication Date: October 2011

Keyword(s): disasters, efficiency, rare events and rational inattention

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Mackowiak, B and Wiederholt, M. 2011. 'Inattention to Rare Events'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8626