Working Paper: NBER ID: w28636
Authors: Roberto Chang; Humberto Martínez; Andrés Velasco
Abstract: The advent of a pandemic is an exogenous shock, but the dynamics of contagion are very much endogenous --and depend on choices that individuals make in response to incentives. In such an episode, economic policy can make a difference not just by alleviating economic losses but also via incentives that affect the trajectory of the pandemic itself. We develop this idea in a dynamic equilibrium model of an economy subject to a pandemic. Just as in conventional SIR models, infection rates depend on how much time people spend at home versus working outside the home. But in our model, whether to go out to work is a decision made by individuals who trade off higher pay from working outside the home today versus a higher risk of infection and expected future economic and health-related losses. As a result, pandemic dynamics depend on factors that have no relevance in conventional models. In particular, expectations and forward-looking behavior are crucial and can result in multiplicity of equilibria with different levels of economic activity, infection, and deaths. The analysis yields novel policy lessons. For example, incentives embedded in a fiscal package resembling the U.S. CARES Act can result in two waves of infection.
Keywords: Pandemics; Economic Policy; Incentives; Dynamic Model
JEL Codes: E6; F4; H3; I3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher perceived risks of infection (I12) | increased time spent at home (D13) |
| increased time spent at home (D13) | reduced infection rates (I14) |
| incentives embedded in fiscal policies (H39) | first wave of infection (reduction) (F44) |
| incentives embedded in fiscal policies (H39) | second wave of infection (increase) (Y50) |
| economic incentives (M52) | trajectory of the pandemic (F44) |
| individual decisions regarding work location (J29) | infection probabilities (I12) |
| infection probabilities (I12) | health outcomes (I14) |