Working Paper: CEPR ID: DP14596
Authors: Anton Korinek; Zachary Bethune
Abstract: We analyze the externalities that arise when social and economic interactions transmit infectious diseases such as COVID-19. Individually rational agents do not internalize that they impose infection externalities upon. In an SIR model calibrated to capture the main features of COVID-19 in the US economy, we show that private agents perceive the cost an additional infection to be around $80k whereas the social cost including infection externalities is more than three times higher, around $286k. This misvaluation has stark implications for how society ultimately overcomes the disease: individually rational susceptible agents act cautiously to “flatten the curve” of infections, but the disease is not overcome until herd immunity is acquired, with a slow recovery over several years. By contrast, the socially optimal approach in our model contains and eradicates the disease, producing a much milder recession. Eradication is optimal even if the infected and susceptible cannot be targeted independently, although the economic cost is much higher.
Keywords: COVID-19; infection externalities; cost of disease; social distancing
JEL Codes: E1; E65; H12; H23; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private agents perceive the cost of an additional COVID-19 infection (J17) | social cost of an additional infection (I12) |
| misvaluation of the cost of infection by private agents (D82) | excessive economic activity among infected individuals (P44) |
| decentralized equilibrium (D59) | disease becomes endemic (I12) |
| social planner significantly reduces activity of infected agents (H39) | mitigate the spread of the disease (I14) |
| social planner's approach (P11) | quicker eradication of the disease (Q16) |
| social planner internalizes infection externalities (D62) | milder recession (E65) |
| hidden epidemiological status of individuals (I12) | social cost perceived by the planner is more than twice as high as that perceived by decentralized agents (D61) |