Smarter lockdowns

Which households should incur the largest welfare costs?

Kaplan and al. integrate an expanded SIR model of virus spread into a heterogeneous-agent incomplete-markets macroeconomic model which allows them to account for unevenly distributed welfare losses across the population. Their SIR model includes an ICU capacity constraint and allows for the economic behavior of the agents to affect the virus transmission rate. Their economic model , on the other hand, includes three types of goods (regular goods, social goods and home-produced goods); three types of labor (in the workplace, remote, and home production); and allows for occupations to differ according to their flexibility for remote work. They construct a “distributional pandemic possibility frontier” to study the average welfare cost as well as the dispersion in these costs for different policy scenarios. Some of their findings include:

• Households in the middle of the income distribution incur the largest welfare costs whether there is a lockdown or not. Government transfers mitigate the welfare costs for the households at the bottom of the income distribution, while the ones at the top of the distribution work in flexible jobs;
• “The economic welfare costs of the pandemic are large and heterogeneous regardless of the policy response. Even smart containment and fiscal policies that offer a more favorable trade-off in terms of mean outcomes entail very uneven outcomes. Thus, whereas most of the emphasis in public debate has been on the extent of the trade-off that governments face in terms of lives and livelihoods, we emphasize the equally important and inescapable choice over which parts of the population should carry the heaviest burden of the economic costs.“

The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S.
Authors: Greg Kaplan, Benjamin Moll, Giovanni L. Violante
From: University of Chicago, London School of Economics, Princeton University

Flattening the curve or shortening the pandemic’s duration?

Łukasz Rachel in this paper is using a SIR model, similar to Kaplan and al. but without ICU capacity constraints, within a general equilibrium setting. He analyzes two types of equilibria:

• A decentralized equilibrium in which perfectly informed individuals decide optimally on costly mitigation behavior i.e. individuals who are currently infected or recovered never choose to lock down in equilibrium and susceptible individuals do not react at the beginning of the epidemic when the risk is relatively low. As the epidemic gathers pace there is a sudden switch in behavior of the susceptibles, from no- to maximum social distancing. As a result, individually-optimal voluntary behavior, absent policy intervention, leads to a declining number of new infections over time, and a subsequent flattening of the epidemic curve in the aggregate. But, it also leads to a significant lengthening of the pandemic.
• An optimal lockdown policy where the planner chooses either maximum mitigation (full lockdown) or no mitigation at all. In this case the optimal policy does not aim to flatten the curve, instead the focus is on achieving the lowest cumulative death toll at minimum cost. As a result, the economic benefits of optimal policy are substantial, as the planner cuts the duration of the crisis .

An Analytical Model of Covid-19 Lockdowns: Equilibrium Mitigation Flattens the Epidemic Curve, Optimal Lockdown Does Not
Authors: Łukasz Rachel
From: London School of Economics

Run your own simulations

MIT has created a simulations dashboard using the model Daron Acemoglu, Victor Chernozhukov, Iván Werning and Michael D. Whinston developed in “Optimal Targeted Lockdowns in a Multi-Group SIR Model.”