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Discussion Paper Details

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

Author(s): Andrew Glover, Jonathan Heathcote, Dirk Krueger and Jose-Victor Rios-Rull

Publication Date: April 2020

Keyword(s): COVID-19, Economic Policy and redistribution

Programme Area(s): Labour Economics, Macroeconomics and Growth, Monetary Economics and Fluctuations and Public Economics

Abstract: Many countries are shutting non-essential sectors of the economy to slow the spread of COVID-19. The gains and losses from these policies are very unequally distributed. Older individuals have most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper we first extend a standard epidemiological model of disease progression to include heterogeneity by age, and multiple sources of disease transmission. We then incorporate the epidemiological block into a multi-sector economic model in which workers differ by sector (basic and luxury) as well as by health status. Individuals value consumption, life, and health. We study optimal mitigation policies of a utilitarian government that can redistribute resources across individuals, but where such redistribution is costly. We show that optimal redistribution- and mitigation policies interact and thus the utilitarian government chooses a very different mitigation policy path than would be suggested by a representative agent setting. This policy reflects a compromise between the strongly diverging preferred policy paths across the subgroups of the population.

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Bibliographic Reference

Glover, A, Heathcote, J, Krueger, D and Rios-Rull, J. 2020. 'Health versus Wealth: On the Distributional Effects of Controlling a Pandemic'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14606