Optimal Subsidies in an Equilibrium Model with Externalities∗
نویسندگان
چکیده
We study the problem of optimally targeting subsidies when the decisions of individual recipients impose externalities on others. In particular, we develop a structural equilibrium model of post-disaster rebuilding when neighborhoods’ amenity values are directly affected by the rate of rebuilding. We estimate and identify the structural parameters of the model via indirect inference, exploiting a discontinuity in the formula for determining the size of grants for rebuilding in New Orleans after Hurricane Katrina, which helps isolate the causal effect of additional nearby rebuilding on households’ rebuilding choices. We find that one household choosing to rebuild significantly increased the probability of nearby neighbors rebuilding. Counterfactual policy experiments find that total-welfare-maximizing subsidy policies bias grant offers against relocation, but the optimal degree of bias decreases with the severity of damages from the disaster. March, 2015 Preliminary and Incomplete: Please do not cite.
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