Martin Gonzalez Eiras

"Optimally Controlling an Epidemic"

Abstract

We propose a flexible model of infectious dynamics with a single endogenous state variable and economic choices by individuals and a government. We analytically characterize equilibrium and optimal outcomes as well as static and dynamic externalities and we calibrate and simulate the model to inform about the ongoing COVID-19 pandemic. We find the following: (i) A lockdown is followed by its opposite---policies to stimulate activity beyond the privately optimal level. (ii) Social distancing has small welfare gains when governments lack instruments to stimulate activity. (iii) Future expected epidemiological changes substantially affect current policy. (iv) Re-infection risk may imply a more cautious steady state than optimal. (v) When a cure or vaccination arrives deterministically, optimal policy may be dis-continuous, featuring a light lockdown when the arrival date exceeds a specific value, and a strict one otherwise.

(Joint with Dirk Niepelt)

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