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Unpublished Paper
Rational Crises
ExpressO (2008)
  • Anup Malani, University of Chicago
  • Albert Choi
Abstract

The paper engages the ongoing debate among scholars such as Cass Sunstein, Max Bazerman and Richard Posner about why governments fail to take action to prevent crises such as Hurricane Katrina and global warming. Standard explanations rely on public choice theories (specifically collective action problems or conflicts between interest groups) or on cognitive limitations (such as hyperbolic discount rates or the inability to value low-probability events). In contrast, we offer a simple rational-choice explanation. The government may not act on information about a forthcoming crisis because there are many lobbies (including government agencies) seeking funding to address their selected crisis and the government cannot distinguish which lobbies have valid claims and which are exaggerating the risk of their selected crisis. In other words, the government does not take preventative action because it fears that some lobbies may simply be crying wolf. What distinguishes our theory from the others is that it explains not only the government’s failure to take precautionary steps before a crisis, but also its behavior after a crisis occurs, specifically its large investments in cleanup and costly inquiries to determine fault for a crisis. We examine a number of solutions to the problem, including fees to lobby the government, fines for sounding false alarms, and the use of expert panels such as the National Academy of Sciences or the Institute of Medicine. In the end, however, we conclude that none will ensure that the government acts in time to prevent crises.

Disciplines
Publication Date
February 25, 2008
Citation Information
Anup Malani and Albert Choi. "Rational Crises" ExpressO (2008)
Available at: http://works.bepress.com/anup_malani/4/