The Distributional Effects of Covid-19 and Optimal Mitigation Policies

Abstract

This paper develops a quantitative heterogeneous agent–life cycle model with a fully integrated epidemiological model in which economic decisions affect the spread of COVID-19 and vice versa. The calibrated model is used to study the distributional consequences and effectiveness of mitigation policies such as a stay-at-home subsidy and a stay-at-home order. First, the stay-at-home subsidy is preferred because it reduces deaths by more and output by less, leading to a larger average welfare gain that benefits all individuals. Second, Pareto-improving mitigation policies can reduce deaths by nearly 45 percent without any corresponding reduction in output relative to no public mitigation. Finally, it is possible to simultaneously improve public health and economic outcomes, suggesting that debates regarding a supposed tradeoff between economic and health objectives may be misguided.

Keywords: pandemic, coronavirus, COVID-19, mitigation, tradeoffs

JEL Classification: D62, E21, E32, E62, I14, I15