Inattention to Rare Events

53 Pages Posted: 26 Aug 2015

See all articles by Bartosz Maćkowiak

Bartosz Maćkowiak

European Central Bank (ECB)

Mirko Wiederholt

Northwestern University - Department of Economics

Date Written: August 25, 2015

Abstract

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

Maćkowiak, Bartosz and Wiederholt, Mirko, Inattention to Rare Events (August 25, 2015). ECB Working Paper No. 1841. Available at SSRN: https://ssrn.com/abstract=2650452

Bartosz Maćkowiak (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Mirko Wiederholt

Northwestern University - Department of Economics ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
(847) 491-8227 (Phone)
(847) 491-7001 (Fax)

HOME PAGE: http://faculty.wcas.northwestern.edu/~mwi774/

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