Optimally controlling an epidemic
The study proposes a flexible model of infectious dynamics with a single endogenous state variable and economic choices by individuals and a government. The autors analytically characterize equilibrium and optimal outcomes as well as static and dynamic externalities, and calibrate and simulate the model to inform about the ongoing COVID-19 pandemic. Findings are as follows: (i) A lockdown is followed by its opposite---policies to stimulate activity beyond the privately optimal level. (ii) Social distancing has small welfare gains when governments lack instruments to stimulate activity. (iii) Future expected epidemiological changes substantially affect current policy. (iv) Re-infection risk may imply a more cautious steady state than optimal. (v) When a cure or vaccination arrives deterministically, optimal policy may be dis-continous, featuring a light lockdown when the arrival date exceeds a specific value, and a strict one otherwise.