Optimal federal transfers during uncoordinated response to a pandemic

Jacek Rothert

No 58, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: An outbreak of a deadly disease pushes policymakers to depress economic activity due to externalities associated with individual behavior. Sometimes, these decisions are left to local authorities (e.g., states). This creates another externality, as the outbreak doesn't respect states' boundaries. A strategic Pigouvian subsidy that rewards states which depress their economies more than the average corrects that externality by creating a race-to-the-bottom type of response. In a symmetric equilibrium nobody receives a subsidy, but the allocation is efficient. If states are concerned about unequal burden of the lockdown costs, but cannot easily issue new debt to finance transfer payments, then lock-downs will be insufficient in some areas and excessive in others. When that's the case, federal stimulus checks can limit the extent of local outbreaks.

Keywords: Covid-19; strategic Pigouvian taxation; fiscal federalism; free-riding; race-to-the-bottom (search for similar items in EconPapers)
JEL-codes: H21 H23 H77 I19 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2021
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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