A Dynamic Model of Rational 'Panic Buying'

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