DP15283 Optimal allocations to heterogeneous agents with an application to the COVID-19 stimulus checks

Author(s): Vegard M. Nygaard, Bent E Sørensen, Fan Wang
Publication Date: September 2020
Date Revised: May 2021
Keyword(s): Aggregate welfare, American Rescue Plan, Consumption inequality, Propensity to Consume, Stimulus Effect
JEL(s): C6, E21, I38
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15283

This paper derives a closed-form solution for optimally allocating resources among heterogeneous individuals subject to individual-specific allocation constraints assuming the planner has CES-preferences and returns to allocations are non-increasing. We derive the optimal allocation of stimulus checks when the government's objective is to i) minimize inequality in consumption, ii) maximize stimulus, and iii) trade off these goals. The inputs for this analysis are obtained from a life-cycle model with heterogeneous households which predicts household-type-specific consumption responses to different stimulus check amounts. Compared to the actual 2021-policy, optimal policies under all levels of inequality-aversion allocate more to low-income families with children.