Limited liability distorts incentives for disaster planning, paper argues

The European Central Bank

Limited liability leads policy-makers to prepare less than they should do for unexpected major events, a working paper published this month by the European Central Bank (ECB) says.

Inattention to rare events, by Bartosz Mackowiak and Mirko Wiederholt, argues the consequences of events with catastrophic financial or other ramifications are aggravated by decision-makers' unpreparedness.

Since limited liability is more likely to apply in unusual circumstances than usual ones, the authors say

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