Stockpiling and Shortages

We examine the feedback loop between shortages and consumer stockpiling. The expectation of shortages induces consumers to stockpile, which amplifies the shortages they experience, which further encourages stockpiling. We show that, when aggregate supply is insufficient to meet aggregate demand and prices cannot adjust to clear the market, multiple equilibria exist which feature stockpiling to different degrees. Even when the fundamental supply shortfall is small, significant stockpiling can arise in equilibrium. Stockpiling reduces welfare, and this welfare loss is particularly severe in the transitional phase following the supply shock, during which consumers accumulate inventories.