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

Rafael Salvador Espinosa Ramirez

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.

Keywords


fear externality; integrated markets; subsidy; COVID-19; cooperative policies; emotions; cognitive bias; consumer decision; welfare analysis; international trade.

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