By Andrew Glover, Jonathan Heathcote, Dirk Krueger and José-Víctor Ríos-Rull
To slow the spread of COVID-19, many countries are shutting down non-essential sectors of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young and retired), by sector (basic and luxury), and by health status. Disease transmission occurs in the workplace, in consumption activities, at home, and in hospitals. We study the optimal economic mitigation policy of a utilitarian government that can redistribute across individuals, but where such redistribution is costly. We show that optimal redistribution and mitigation policies interact, and reflect a compromise between the strongly diverging preferred policy paths of different subgroups of the population. We find that the shutdown in place on April 12 is too extensive, but that a partial shutdown should remain in place through July.
Among the hundreds of papers already written on COvid-19, a few stand out, and this is one of the select few. Proper confinement design is an important question, especially as it has very strong distributional consequences. Here, the best tools of trade are applied to understand the consequences of the current confinement policies. Of course, the paper was produced in record time and you could argue about some choices, but this draft shows clearly that a more nuanced approach is warranted. History will tells us whether this is right.