Discussion paper

DP15283 Optimal allocations to heterogeneous agents with an application to stimulus checks

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.

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Citation

Nygaard, V, B Sørensen and F Wang (eds) (2020), “DP15283 Optimal allocations to heterogeneous agents with an application to stimulus checks”, CEPR Press Discussion Paper No. 15283. https://new.cepr.org/publications/dp15283-3