A Dynamic Model of Rational 'Panic Buying'

Abstract

This paper analyzes panic buying of storable consumer goods accompanied by disasters. We develop a novel consumer-search model where consumers follow (S,s) inventory policies and a method to simulate the model against various types of fundamental shocks. We demonstrate that, even if agents are fully rational, an anticipated temporary increase in consumer shopping costs can trigger an upward spiral of hoarding demand and result in panic buying. Due to congestion externalities, panic buying causes misallocation and substantial welfare loss. Our simulation experiments discover factors relevant to the severity of panic buying. We also analyze the effectiveness of various policy measures.

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