A Dynamic Model of Rational 'Panic Buying'

69 Pages Posted: 2 Nov 2020 Last revised: 9 Jul 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 novel macroeconomic model of consumers' inventory adjustment featuring search frictions in shopping. Even if consumers are fully rational, an anticipated temporary increase in consumer shopping costs (caused by a disaster itself or a state of emergency) can trigger an upward spiral of hoarding demand and result in serious panic buying. As a result of congestion externalities, panic buying leads to the misallocation of storable goods and substantial welfare loss. We demonstrate that (i) the timing of emergency announcements crucially affects the severity of panic buying, (ii) price controls help in mitigating hoarding if retail prices are rigid in nature, and (iii) taxes on purchases and direct distribution of basic necessities can be effective if they are implemented in an appropriate manner.

Keywords: Hoarding; Panic buying; Disaster; COVID-19; Search frictions; Congestion externality; Heterogeneous agents model; Mean-field game

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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