The Hammer and the Scalpel: On the Economics of Indiscriminate Versus Targeted Isolation Policies During Pandemics

29 Pages Posted: 26 May 2020

See all articles by Varadarajan Chari

Varadarajan Chari

affiliation not provided to SSRN

Rishabh Kirpalani

University of Wisconsin - Madison

Christopher Phelan

University of Minnesota - Minneapolis

Date Written: May 2020

Abstract

We develop a simple dynamic economic model of epidemic transmission designed to be consistent with widely used SIR biological models of the transmission of epidemics, while incorporating economic benefits and costs as well. Our main finding is that targeted testing and isolation policies deliver large welfare gains relative to optimal policies when these tools are not used. Specifically, we find that when testing and isolation are not used, optimal policy delivers a welfare gain equivalent to a 0.6% permanent increase in consumption relative to no intervention. The welfare gain arises because under the optimal policy, the planner engineers a sharp recession that reduces aggregate output by about 40% for about 3 months. This sharp contraction in economic activity reduces the rate of transmission and reduces cumulative deaths by about 0.1%. When testing policies are used, optimal policy delivers a welfare gain equivalent to a 3% permanent increase in consumption. The associated recession is milder in that aggregate output declines by about 15% and cumulative deaths are reduced by .3%. Much of this welfare gain comes from isolating infected individuals. When individuals who are suspected to be infected are isolated without any testing, optimal policy delivers a welfare gain equivalent to a 2% increase in permanent consumption.

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Suggested Citation

Chari, Varadarajan and Kirpalani, Rishabh and Phelan, Christopher, The Hammer and the Scalpel: On the Economics of Indiscriminate Versus Targeted Isolation Policies During Pandemics (May 2020). NBER Working Paper No. w27232, Available at SSRN: https://ssrn.com/abstract=3609685

Varadarajan Chari (Contact Author)

affiliation not provided to SSRN

Rishabh Kirpalani

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Christopher Phelan

University of Minnesota - Minneapolis

420 Delaware St SE
Minneapolis, MN 55454
United States

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