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Optimal federal redistribution during the uncoordinated response to a pandemic

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  • Jacek Rothert

    (United States Naval Academy)

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 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 equilibrium nobody receives a subsidy, but the allocation is efficient. If local authorities are concerned about unequal burden of the lockdown costs but cannot easily issue new debt to finance transfer payments, then lockdowns will be insufficient in some areas and excessive in others. When that’s the case, federal stimulus checks can flatten the infection curve.

Suggested Citation

  • Jacek Rothert, 2020. "Optimal federal redistribution during the uncoordinated response to a pandemic," Departmental Working Papers 64, United States Naval Academy Department of Economics.
  • Handle: RePEc:usn:usnawp:64
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    File URL: http://www.usna.edu/EconDept/RePEc/usn/wp/usnawp64.pdf
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    Cited by:

    1. Jacek Rothert & Ryan Brady & Michael Insler, 2020. "The Fragmented United States of America: The impact of scattered lock-down policies on country-wide infections," Departmental Working Papers 65, United States Naval Academy Department of Economics.
    2. Rothert, Jacek, 2021. "Strategic inefficiencies and federal redistribution during uncoordinated response to pandemic waves," European Journal of Political Economy, Elsevier, vol. 69(C).
    3. Jacek Rothert & Ryan Brady & Michael Insler, 2020. "Local containment policies and country-wide spread of Covid-19 in the United States: an epidemiological analysis," GRAPE Working Papers 48, GRAPE Group for Research in Applied Economics.
    4. Jean-Paul Renne & Guillaume Roussellet & Gustavo Schwenkler, 2020. "Preventing COVID-19 Fatalities: State versus Federal Policies," Papers 2010.15263, arXiv.org, revised Dec 2020.

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