Optimal allocations to heterogeneous agents with an application to stimulus checks

A planner allocates discrete transfers of size Dg to N heterogeneous groups labeled g and has CES preferences over the resulting outcomes, Hg(Dg). We derive a closed-form solution for optimally allocating a fixed budget subject to group-specific inequality constraints under the assumption that incre...

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Bibliographic Details
Published inJournal of economic dynamics & control Vol. 138; p. 104352
Main Authors Nygaard, Vegard M., Sørensen, Bent E., Wang, Fan
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.05.2022
Subjects
American rescue plan
Consumption inequality
Economic stimulus act
Propensity to consume
Welfare inequality
Consumption inequality
C6
E21
Propensity to consume
Welfare inequality
Economic stimulus act
American rescue plan
I38
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Summary:A planner allocates discrete transfers of size Dg to N heterogeneous groups labeled g and has CES preferences over the resulting outcomes, Hg(Dg). 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 Hg 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.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2022.104352