Working Paper: CEPR ID: DP14520
Authors: Martin Eichenbaum; Sergio Rebelo; Mathias Trabandt
Abstract: We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people's decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the U.S.
Keywords: epidemic; covid19; recessions; containment policies
JEL Codes: E1; I1; H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decision to reduce consumption and work (E21) | Decrease in the severity of the epidemic (E32) |
| Decision to reduce consumption and work (E21) | Exacerbation of the recession (E65) |
| Competitive equilibrium is not Pareto optimal (D59) | Infected individuals do not internalize the impact of their actions on the spread of the virus (D62) |
| Optimal containment policies (E61) | Save lives (I19) |
| Optimal containment policies (E61) | Deepen the recession (E65) |