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

Rafael Salvador Espinosa Ramirez


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.


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

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