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Journal Articles Journal of Monetary Economics Year : 2018

Lack of Preparation for Rare Events


A new view of crises is proposed: A rare event occurs, consciously unprepared agents take bad actions, and catastrophic consequences follow. We model agents who prepare to act in different contingencies. They can process only a finite amount of information and thus cannot prepare perfectly for all contingencies. In equilibrium, agents equate the probability-weighted expected loss due to suboptimal action across contingencies, implying that the expected loss in a rare event is orders of magnitude larger than in normal times. Limited liability causes even less preparation for rare events and creates inefficiencies.
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hal-03943567 , version 1 (17-01-2023)


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Bartosz Maćkowiak, Mirko Wiederholt. Lack of Preparation for Rare Events. Journal of Monetary Economics, 2018, 100, pp.35-47. ⟨10.1016/j.jmoneco.2018.07.007⟩. ⟨hal-03943567⟩
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