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Optimal federal transfers during uncoordinated response to a pandemic

Author

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  • Jacek Rothert

    (United States Naval Academy
    Group for Research in Applied Economics (GRAPE))

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.

Suggested Citation

  • Jacek Rothert, 2021. "Optimal federal transfers during uncoordinated response to a pandemic," GRAPE Working Papers 58, GRAPE Group for Research in Applied Economics.
  • Handle: RePEc:fme:wpaper:58
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    File URL: http://grape.org.pl/WP/58_Rothert_website.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Covid-19; strategic Pigouvian taxation; fiscal federalism; free-riding; race-to-the-bottom;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I19 - Health, Education, and Welfare - - Health - - - Other

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