The Economics of Need Based Transfers

Dieter Armbruster

Arizona State University

Need based transfers (NBT) are actions to compensate losses after disasters. NBT are given based on shared values and reflect the understanding of the random nature of disasters. Codified, they create an economic system that we call the Economics of Gift Giving. To be specific, we study an economic system, whereby people that fall below a threshold (e.g. welfare threshold) will receive help from people that are richer. In a series of projects focused on agent based simulations, we have studied different aspects of this economy: i) We have discussed the impact of the different nature of economic disasters, specifically the correlation between disasters. We show that, all other things being equal, spatially correlated disasters have a lower impact than temporally correlated disasters. ii) We have studied the impact of the rules of NBT - if multiple agents are in need, who is allowed to ask first and whom do they ask. We find that, for a short time horizons, the optimization is similar to a knapsack problem: Resources are optimally used when an agent with surplus y supports an agent that needs y-a with a as small as possible. However, if disasters happen frequently and a long term horizon is considered, this policy leads to extremely bad long term outcomes whereas a policy that asks the richest agent first seems to be optimal. iii) In order to go beyond pure simulation studies, we are also using kinetic theory to generate Boltzmann-type equations and their hydrodynamic limits, leading to Fokker-Planck type equations for the time evolution of the wealth distributions. Analyses of these equations show the emergence of egalitarian or very unequal wealth distributions depending on different priority rules for NBT. In addition those policies provide different answers to different optimization problems like how to reduce the number of agents below the welfare threshold in shortest time vs. how to maximize the number of survivors.

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