COVID-19: Mitigation Measures and the Aftershock in an Overlapping Generations Model

Abstract

Older, unhealthy individuals seem especially vulnerable to the coronavirus. Using an overlapping
generations model, we show that a targeted lockdown policy based on preexisting health conditions would have reduced the economic severity of the pandemic by 22.5% without compromising health outcomes. Our model predicts that after the mandatory lockdown measures are lifted, individuals respond to the continued infection risk by lowering their labor supply, resulting in a slower economic recovery where output remains 2.16% below trend. The model predicts significant heterogeneity in agent’s behavioral response to the lingering infection risk. While the vulnerable wealth rich can be convinced to stay home by transfers equalling 10% of their earnings, it would require 35% of own earnings to compensate the vulnerable wealth poor. In aggregate, the vulnerable working age individuals who are at risk of infections can be convinced to self-isolate at a cost of 0.43% of GDP, once the lockdown is lifted.

Keywords: COVID-19, Mitigation, OLG, Redistribution, Welfare

JEL Classification: D15, I12, C54