Pandemic Death Traps

Abstract

Faced with a pandemic, how does the government decide whether to shut down the economy or employ less economically-damaging mitigation measures, and what are the second-best distortions in this decision? We address this question from a positive (how does) rather than a normative (how should) standpoint to explain how differences in second-best distortions can lead to differences in policy responses to a pandemic across different countries, and why there may be a disposition for shutdowns despite these differences. Our analysis develops a two-period production-consumption model in which the economy can be hit with health shocks in the form of pandemics in both periods. The government can choose to do nothing, invest in mitigation to attenuate the effects of a shock, shut down the economy, or choose to invest in mitigation and shut down the economy. Shutting down the economy leads to fewer expected deaths but also creates loss of economic output, with consequences for the economy's ability to invest in mitigation when hit with future health shocks. We derive conditions under which mitigation without a shutdown is the optimal policy choice and conditions under which mitigation with a shutdown is the optimal policy. We then introduce public health experts who advise the government on its policy response. We show that these experts' career concerns can induce a shutdown even when their private information indicates that not shutting down is Pareto superior. The public health experts' career concerns can thus induce a policy "death trap" and lead to the wrong choice. We also discuss why shutdowns may be more damaging in emerging markets than in developed countries.

Keywords: pandemic, COVID-19, lockdown, shutdown, career concerns, emerging markets

JEL Classification: D6, D78, H1, I18