A Dynamic Model of Rational 'Panic Buying'

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