Inattention to Rare Events
53 Pages Posted: 26 Aug 2015
Date Written: August 25, 2015
The world recently experienced several rare events with disastrous consequences: the global financial crisis, the European sovereign debt crisis, and the Fukushima nuclear accident. These events have in common that key decision-makers were unprepared for them, which aggravated these events. We develop a model in which agents make state-contingent plans — prepare to act in different contingencies — subject to the constraint that agents can process only a finite amount of information. We identify the forces that make agents prepare little for some contingencies. We study whether a social planner would want agents to prepare more for rare events.
Keywords: rare events, disasters, rational inattention, efficiency
JEL Classification: D83, E58, E60
Suggested Citation: Suggested Citation