Strategic inefficiencies and federal redistribution during uncoordinated response to pandemic waves

Jacek Rothert

European Journal of Political Economy, 2021, vol. 69, issue C

Abstract: Optimal policy during an epidemic calls for depressed economic activity to slow down the outbreak. Sometimes, these decisions are left to local authorities (e.g. states). This creates an externality, as the outbreak does not respect states’ boundaries. The externality directly exacerbates the outbreak. Indirectly, it creates a free-rider problem, because local policymakers pass the cost of fighting the outbreak on to other states. A standard system of distortionary taxes and lump-sum transfers can implement the optimal allocation, with higher tax rates required if states behave strategically. A strategic system of taxes and transfers, rewarding states which depress their economies more than average, improves the outcomes by creating a race-to-the-bottom type of response. In a symmetric equilibrium, the optimal tax rate is lower if states behave strategically.

Keywords: COVID-19; Strategic Pigouvian taxation; Pandemic waves; Fiscal federalism; Freeriding; Race-to-the-bottom (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0176268021000045
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Strategic inefficiencies and federal redistribution during uncoordinated response to pandemic waves (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:69:y:2021:i:c:s0176268021000045

DOI: 10.1016/j.ejpoleco.2021.102003

Access Statistics for this article

European Journal of Political Economy is currently edited by J. De Haan, A. L. Hillman and H. W. Ursprung

More articles in European Journal of Political Economy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().