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Strategic inefficiencies and federal redistribution during uncoordinated response to pandemic waves

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  • Rothert, Jacek

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 does not respect states’ boundaries. The externality directly exacerbates the outbreak. Indirectly, it creates a free-rider problem, because local policymakers pass the cost of fighting the outbreak on to other states. A standard system of distortionary taxes and lump-sum transfers can implement the optimal allocation, with higher tax rates required if states behave strategically. A strategic system of taxes and transfers, rewarding states which depress their economies more than average, improves the outcomes by creating a race-to-the-bottom type of response. In a symmetric equilibrium, the optimal tax rate is lower if states behave strategically.

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  • Rothert, Jacek, 2021. "Strategic inefficiencies and federal redistribution during uncoordinated response to pandemic waves," European Journal of Political Economy, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:poleco:v:69:y:2021:i:c:s0176268021000045
    DOI: 10.1016/j.ejpoleco.2021.102003
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    Cited by:

    1. Farzanegan, Mohammad Reza & Gholipour, Hassan F., 2023. "COVID-19 fatalities and internal conflict: Does government economic support matter?," European Journal of Political Economy, Elsevier, vol. 78(C).
    2. Jacek Rothert, 2021. "Optimal federal transfers during uncoordinated response to a pandemic," GRAPE Working Papers 58, GRAPE Group for Research in Applied Economics.
    3. Jacek Rothert, 2021. "Blocking the light at the end of the tunnel? Optimal teleworking agreements and management's revealed preferences when vaccine is on the horizon," Departmental Working Papers 68, United States Naval Academy Department of Economics.
    4. Jacek Rothert, 2022. "Optimal federal transfers during uncoordinated response to a pandemic," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 1124-1153, October.

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    More about this item

    Keywords

    COVID-19; Strategic Pigouvian taxation; Pandemic waves; Fiscal federalism; Freeriding; Race-to-the-bottom;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • 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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