A Dynamic Model of Rational 'Panic Buying'

76 Pages Posted: 2 Nov 2020 Last revised: 8 Apr 2021

See all articles by Shunya Noda

Shunya Noda

Vancouver School of Economics, University of British Columbia

Kazuhiro Teramoto

New York University (NYU), Department of Economics, Students

Date Written: October 29, 2020

Abstract

This paper analyzes panic buying of storable consumer goods, using a dynamic inventory-adjustment model with heterogeneous consumers. Even if consumers are fully rational, the anticipation of a temporary increase in consumer shopping costs (caused by a disaster itself or a state of emergency) can trigger an upward spiral of demand for stockpiling and result in serious panic buying. Our model articulates how panic buying prevents an efficient allocation of storable goods due to a coordination failure and significantly harms the consumers' welfare. Government policies such as taxes on purchases and direct distribution of necessities can curb panic buying and enhance social welfare. We also find that the timing of government interventions crucially influences their effectiveness.

Keywords: Disaster, COVID-19, Hoarding, Optimal stopping time, Sticky price

JEL Classification: D45, E21, E69, 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)

Vancouver School of Economics, University of British Columbia ( email )

6000 Iona Dr
Vancouver, British Columbia V6T 1L4
Canada

Kazuhiro Teramoto

New York University (NYU), Department of Economics, Students ( email )

19 W. 4th Street, 6FL
Department of Economics
NEW YORK, NY New York 10012
United States
10012 (Fax)

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