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Research Details

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

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.

Type

Working Paper

Author(s)

Sergio Rebelo, Martin S. Eichenbaum, Mathias Trabandt, Francisco Lima, Miguel Godinho de Matos

Date Published

2020

Citations

Rebelo, Sergio, Martin S. Eichenbaum, Mathias Trabandt, Francisco Lima, and Miguel Godinho de Matos. 2020. How do People Respond to Small Probability Events with Large, Negative Consequences?.

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