Globalization Institute Working Paper
The Distributional Effects of COVID-19 and Optimal Mitigation Policies
No. 400 (Revised March 2021, new title October 2020)
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 60 percent while only slightly reducing output relative to no 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.