A Dynamic Model of Rational 'Panic Buying'

44 Pages Posted: 2 Nov 2020 Last revised: 27 Oct 2023

See all articles by Shunya Noda

Shunya Noda

University of Tokyo - Faculty of Economics

Kazuhiro Teramoto

Hitotsubashi University - Graduate School of Economics

Date Written: October 29, 2020

Abstract

This paper analyzes panic buying of storable consumer products accompanied by disasters, using a novel consumer-search theoretic equilibrium model where consumers follow (S,s) inventory policies. We show that, even if consumers are fully rational, an anticipated temporary increase in consumer shopping costs (as well as conventional demand and supply shocks) can trigger an upward spiral of hoarding demand and result in serious shortages. Due to congestion externalities, panic buying leads to the misallocation of storable products and substantial welfare loss. The model is calibrated using survey data and reveals that the timing of recognizing the shopping-cost rise is crucial for the severity of panic buying. Some policy options, such as purchase quotas and future sales-tax reductions, are suggested to mitigate panic buying.

Keywords: Hoarding; Panic buying; Search frictions; Congestion externality; Disaster; COVID-19; Heterogeneous agents model; Mean-field game

JEL Classification: C61, D15, D45, E21, H84, Q54

Suggested Citation

Noda, Shunya and Teramoto, Kazuhiro, A Dynamic Model of Rational 'Panic Buying' (October 29, 2020). Available at SSRN: https://ssrn.com/abstract=3721706 or http://dx.doi.org/10.2139/ssrn.3721706

Shunya Noda (Contact Author)

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo, 113-0033
Japan

Kazuhiro Teramoto

Hitotsubashi University - Graduate School of Economics ( email )

Naka 2-1
Kunitachi, Tokyo 186-8601
Japan

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