Optimal federal transfers during uncoordinated response to a pandemic

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.

Introduction to the special issue on new insights into economic epidemiology: Theory and policy

“…The paper by Rothert (2021) is an insightful contribution to the free‐riding problem outlined above. Rothert “shortcuts” the dynamic dimension of the problem inherent in epidemic diffusion to focus on the strategic issues raised by the decentralization of epidemic control policies.…”

“…This section of this special issue proposes two contrasted contributions to this topic. The two contributions build on two complementary frameworks for the analysis of spatial externalities in an outbreak context: one deals with the associated strategic aspects in a static model (Rothert, 2021), and the other solves a first-best spatiotemporal problem of epidemic control (La Torre et al, 2022). 1 1 These externality problems are very close in nature to those involved in transboundary pollution, though the "infection" mechanisms are different.…”

Geographical heterogeneities and externalities in an epidemiological‐macroeconomic framework

“…A growing number of works have recently analyzed how macroeconomic activity is related to epidemic diseases by investigating the role of the most commonly used form of control strategy, that is social distancing policies, to limit the spread of the epidemic (Brodeur et al, 2021; Boucekkine et al, 2021). Several papers discuss the effects of different social distancing measures in the short (Acemoglu et al, 2021; LaTorre et al, 2021a) and long run (Alvarez et al, 2021; Gori, Manfredi, et al, 2021), in centralized (Caulkins et al, 2021; Gollier, 2020) and decentralized settings (Eichenbaum et al, 2021; Rothert, 2021), in the contexts of delays in disease transmissions and policy implementation (Aspri et al, 2021; Hritonenko et al, 2021). However, none of them accounts for the spatial implications of the disease dynamics, thus we contribute to this literature by discussing how the presence of geographical effects may modify our conclusions regarding the effectiveness of different health policy and the design of the most appropriate policy‐mix to control the (local and global) spread of the disease.…”

The complex interplay between COVID-19 and economic activity

“…Among the latter, we find studies focused on the heterogeneous effects produced by shelter-in-place policies ( Cerqueti et al, 2021 , Dizioli and Pinheiro, 2021 , Gallic et al, 2021 ), the economic determinants of timing and intensity of the policy reaction to pandemic ( Ferraresi et al, 2020 ), and the cost of strict policy measures, such as the lockdown. In turn, this cost has been declined in terms of job losses ( Friedson et al, 2021 ), changes to consumers behavior ( Goolsbee and Syverson, 2021 ), households income and wealth ( Coibion et al, 2020 ), fairness and cooperation ( Buso et al, 2020 ), uncertainty and expectations ( Pellegrino et al, 2021 ), externalities ( Rothert, 2021 ) and GDP ( Ilzetzki and Moll, 2020 ).…”