Pandemics, Incentives, and Economic Policy: A Dynamic Model

52 Pages Posted: 31 Mar 2021

See all articles by Roberto Chang

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics; National Bureau of Economic Research (NBER)

Humberto Martinez

Rutgers, The State University of New Jersey - Rutgers University

Andrés Velasco

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2021

Abstract

The advent of a pandemic is an exogenous shock, but the dynamics of contagion are very much endogenous - and depend on choices that individuals make in response to incentives. In such an episode, economic policy can make a difference not just by alleviating economic losses but also via incentives that affect the trajectory of the pandemic itself. We develop this idea in a dynamic equilibrium model of an economy subject to a pandemic. Just as in conventional SIR models, infection rates depend on how much time people spend at home versus working outside the home. But in our model, whether to go out to work is a decision made by individuals who trade o§ higher pay from working outside the home today versus a higher risk of infection and expected future economic and health-related losses. As a result, pandemic dynamics depend on factors that have no relevance in conventional models. In particular, expectations and forward-looking behavior are crucial and can result in multiplicity of equilibria with different levels of economic activity, infection, and deaths. The analysis yields novel policy lessons. For example, incentives embedded in a fiscal package resembling the U.S. CARES Act can result in two waves of infection.

Suggested Citation

Chang, Roberto and Martinez, Humberto and Velasco, Andrés, Pandemics, Incentives, and Economic Policy: A Dynamic Model (March 1, 2021). CEPR Discussion Paper No. DP15977, Available at SSRN: https://ssrn.com/abstract=3816863

Roberto Chang (Contact Author)

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Humberto Martinez

Rutgers, The State University of New Jersey - Rutgers University

Andrés Velasco

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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