Working Paper: NBER ID: w27046
Authors: Andrew Glover; Jonathan Heathcote; Dirk Krueger; Josvctor Rosrull
Abstract: To slow the spread of the COVID-19 virus, many countries shut down parts of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have most to lose. We build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young, retired), by sector (basic, luxury), and by health status. Disease transmission occurs in the workplace, through consumption, at home, and in hospitals. We study the optimal economic mitigation policy for a government that can redistribute through taxes and transfers, but where taxation distorts labor supply. We show that shutdowns are optimally milder in 2020 when taxes are distortionary, and when the government does not have access to debt. A harder but shorter shutdown is preferred when vaccines become available in the first half of 2021.
Keywords: COVID-19; Pandemic; Economic Policy; Health Economics
JEL Codes: E20; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal mitigation policy during a pandemic is sensitive to the distribution of health outcomes across different age groups (I14) | older individuals benefit more from lockdowns (J14) |
| older individuals benefit more from lockdowns (J14) | divergence in preferences for lockdowns between young and old individuals (D15) |
| government can use redistributive tax and transfer policies to address disparities in health outcomes (I14) | older individuals benefit more from lockdowns (J14) |
| expectations about vaccine availability significantly influence optimal lockdown policies (C53) | harsher restrictions deemed necessary when vaccines are not anticipated (Z28) |
| optimal path of mitigation balances the economic costs of shutdowns against the health benefits (D61) | complex interaction between economic activity and health outcomes (I15) |