Health versus Wealth: On the Distributional Effects of Controlling a Pandemic

Andrew Glover, Jonathan Heathcote, Dirk Krueger, José-Víctor Ríos-Rull

NBER Working Paper No. 27046
Issued in April 2020, Revised in July 2020
NBER Program(s):Economics of Aging, Economic Fluctuations and Growth, Health Economics, Labor Studies, Public Economics

To slow COVID-19, many countries have shut down part of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young, retired), by sector (basic, luxury), and health status. Disease transmission occurs in the workplace, through consumption, at home, and in hospitals. We study the optimal economic mitigation policy for a government that can redistribute across individuals, but where redistribution is costly. Optimal redistribution and mitigation policies interact, and more modest shutdowns are optimal when redistribution is more costly. We find that the shutdowns that were implemented in mid-April were too extensive, but a partial shutdown should remain in place through the fall. A deeper and longer shutdown is preferred if a vaccine is imminent.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w27046