Optimal Allocations to Heterogeneous Agents with an Application to Stimulus Checks
57 Pages Posted: 22 Sep 2020 Last revised: 4 Feb 2022
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Optimal Allocation of the COVID-19 Stimulus Checks
Date Written: September 2020
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: American Rescue Plan, Consumption inequality, Economic Stimulus Act, Propensity to Consume, Welfare inequality
JEL Classification: C6, E21, I38
Suggested Citation: Suggested Citation