Fear Shocks, Subsidies and Covid-19 In an Integrated Market

Rafael Salvador Espinosa Ramirez

doi:10.4067/S0718-88702021000200053

Authors

Rafael Salvador Espinosa Ramirez Departamento de Economía, Universidad de Guadalajara, México http://orcid.org/0000-0002-5049-9175

DOI:

https://doi.org/10.4067/S0718-88702021000200053

Keywords:

Fear shock, integrated markets, subsidy, COVID-19, cooperative policies, emotions, cognitive bias, consumer decision, welfare analysis, international trade

Abstract

In an imperfect competition model of trade a domestic and foreign country establish a cooperative or non-cooperative subsidy schedule. The optimal subsidies are positive but different in size depending of the firm’s efficiency and the magnitude of the consumer market. After setting the subsidy, a fear shock in the domestic country caused by COVID-19 affects the domestic welfare depending on the subsidy schedule and firms’ efficiency. The effect of a fear shock in foreign country depends on his patter of trade. Finally, when fear shock affects negatively the welfare, the best policy response is to reduce the subsidy.

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Author Biography

Rafael Salvador Espinosa Ramirez, Departamento de Economía, Universidad de Guadalajara, México

Department of Economics

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