Optimal Allocations to Heterogeneous Agents with An Application to Stimulus Checks

55 Pages Posted: 5 May 2021 Last revised: 8 Apr 2022

See all articles by Vegard M. Nygaard

Vegard M. Nygaard

University of Houston

Bent E. Sørensen

University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)

Fan Wang

University of Houston - Department of Economics

Date Written: March 31, 2022

Abstract

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.

Keywords: Economic Stimulus Act; American Rescue Plan; Consumption inequality; Propensity to consume; Welfare inequality

JEL Classification: I38; E21; C6

Suggested Citation

Nygaard, Vegard M. and Sorensen, Bent E. and Wang, Fan, Optimal Allocations to Heterogeneous Agents with An Application to Stimulus Checks (March 31, 2022). Journal of Economic Dynamics and Control 138 (May 1, 2022): 104352. https://doi.org/10.1016/j.jedc.2022.104352, Available at SSRN: https://ssrn.com/abstract=3839890 or http://dx.doi.org/10.2139/ssrn.3839890

Vegard M. Nygaard

University of Houston ( email )

Houston, TX 77204-5882
United States

HOME PAGE: http://https://sites.google.com/site/vegardmokleivnygaard/

Bent E. Sorensen

University of Houston - Department of Economics ( email )

204 McElhinney Hall
Houston, TX 77204-5882
United States
713-743-3841 (Phone)
713-743-3798 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Fan Wang (Contact Author)

University of Houston - Department of Economics ( email )

Houston, TX 77204-5882
United States

HOME PAGE: http://fanwangecon.github.io

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