Working Paper: NBER ID: w26984
Authors: Callum J. Jones; Thomas Philippon; Venky Venkateswaran
Abstract: We study the response of an economy to an unexpected epidemic. Households mitigate the spread of the disease by reducing consumption, reducing hours worked, and working from home. Working from home is subject to learning-by-doing and the capacity of the health care system is limited. A social planner worries about two externalities, an infection externality and a healthcare congestion externality. Private agents’ mitigation incentives are too weak and suffer from a fatalism bias with respect to future infection rates. The planner implements front-loaded mitigation policies and encourages working from home immediately. In our calibration, assuming a CFR of 1% and an initial infection rate of 0.1%, private mitigation reduces the cumulative death rate from 2.5% of the initially susceptible population to about 1.75%. The planner optimally imposes a drastic suppression policy and reduces the death rate to 0.15% at the cost of an initial drop in consumption of around 25%.
Keywords: COVID-19; Pandemic; Social Distancing; Economic Policy; Working from Home
JEL Codes: E2; E6; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private mitigation efforts insufficient (H84) | lower level of private mitigation than socially optimal (D61) |
| infection externality (D62) | lower level of private mitigation than socially optimal (D61) |
| healthcare congestion externality (D62) | lower level of private mitigation than socially optimal (D61) |
| planner's implementation of frontloaded mitigation policies (R28) | significant reduction of cumulative death rate from 25% to 1.75% (I14) |
| planner's drastic suppression policy (P11) | further reduction of death rate to 0.15% (I14) |
| planner's drastic suppression policy (P11) | initial 25% drop in consumption (D12) |
| planner's aggressive response (D74) | lower peak infection rate (J11) |
| planner's aggressive response (D74) | significantly reduces fatalities compared to decentralized equilibrium (C62) |
| working from home (J29) | mitigates economic impacts (F69) |
| planner utilizes working from home option more intensively (J22) | peak drop in consumption of 30% compared to 45% without the option (D12) |
| fatalism effect (G41) | weakens private incentives to mitigate early on (D82) |