Working Paper: CEPR ID: DP15541
Authors: Martin Gonzalezeiras; Dirk Niepelt
Abstract: We propose a flexible model of infectious dynamics with a single endogenous state variable and economic choices. We characterize equilibrium, optimal outcomes, static and dynamic externalities, and prove the following: (i) A lockdown generically is followed by policies to stimulate activity. (ii) Re-infection risk lowers the activity level chosen by the government early on and, for small static externalities, implies too cautious equilibrium steady-state activity. (iii) When a cure arrives deterministically, optimal policy is dis-continous, featuring a light/strict lockdown when the arrival date exceeds/falls short of a specific value. Calibrated to the ongoing COVID-19 pandemic the baseline model and a battery of robustness checks and extensions imply (iv) lockdowns for 3-4 months, with activity reductions by 25-40 percent, and (v) substantial welfare gains from optimal policy unless the government lacks instruments to stimulate activity after a lockdown.
Keywords: epidemic; lockdown; forced opening; SIR; SIS; SI; logistic model; COVID-19
JEL Codes: I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lockdowns (H76) | Economic policy adjustments (E69) |
| Reinfection risk (Y50) | Government activity level (H19) |
| Anticipated arrival date of a cure (C41) | Optimal lockdown strictness (H21) |
| Optimal lockdown durations (C41) | Welfare gains (D69) |