Working Paper: CEPR ID: DP15283
Authors: Vegard M. Nygaard; Bent E. Sørensen; Fan Wang
Abstract: A planner allocates discrete transfers of size D_g to N heterogeneous groups labeled g and has CES preferences over the resulting outcomes, H_g(D_g) . We derive a closed-form solution for optimally allocating a fixed budget subject to group-specific inequality constraints under the assumption that increments in the H_g functions are non-increasing. We illustrate our method by studying allocations of "support checks'' from the U.S. government to households during both the Great Recession and the COVID-19 pandemic. We compare the actual allocations to optimal ones under alternative constraints, assuming the government focused on stimulating aggregate consumption during the 2008-2009 crisis and focused on welfare during the 2020-2021 crisis.The inputs for this analysis are obtained from versions of a life-cycle model with heterogeneous households, which predicts household-type-specific consumption and welfare responses to tax rebates and cash transfers.
Keywords: economic stimulus act; american rescue plan; consumption; inequality; propensity to consume; welfare inequality
JEL Codes: I38; E21; C6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of the transfer (F16) | resulting consumption or welfare outcomes for different groups (D63) |
| allocation method (D61) | effectiveness of the stimulus (E65) |
| planner's objectives (L21) | outcomes of the allocations (D61) |
| actual allocations during the Great Recession and COVID-19 (H69) | optimal allocations derived from the model (D61) |