Globalization Institute Working Paper
The Distributional Effects of COVID-19 and Optimal Mitigation Policies
No. 400 (Revised October 2020, new title)
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, conversely, the virus affects economic decisions. The calibrated model is used to study the distributional consequences and effectiveness of two mitigation policies: a stay-at-home subsidy that subsidizes reduced hours worked and a stay-at-home order that limits outside hours. 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, optimal mitigation policies involve a stay-at-home subsidy of $450–$900 per week for 16–18 months, depending on the welfare criterion. 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.