Working Paper: NBER ID: w26882
Authors: Martin S. 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 cut back on consumption and work to reduce the chances of being infected. These decisions reduce the severity of the epidemic but exacerbate the size of the associated recession. 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 United States.
Keywords: epidemics; macroeconomics; SIR model; containment policies
JEL Codes: E1; H0; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individuals reduce consumption (D12) | mitigate risk of infection (I18) |
| individuals reduce labor supply (J22) | mitigate risk of infection (I18) |
| mitigate risk of infection (I18) | affects spread of the epidemic (I14) |
| economic behavior (D22) | health outcomes (I14) |
| reducing consumption and labor supply (J29) | reduces severity of the epidemic (I14) |
| reducing consumption and labor supply (J29) | exacerbates recession's magnitude (E44) |
| infected individuals do not fully internalize externalities (D62) | higher infection rates (I14) |
| optimal containment policies (E61) | significant drop in economic output (F69) |
| optimal containment policies (E61) | save lives (J17) |