DP14613 Optimal COVID-19 Quarantine and Testing Policies

Author(s): Facundo Piguillem, Liyan Shi
Publication Date: April 2020
Date Revised: April 2020
Keyword(s): COVID-19, Optimal quarantine, Optimal testing, Welfare cost of quarantines
JEL(s): E1, E65, H12, I1
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14613

Many countries are taking measures stopping productive activities to slow down the spread of COVID-19. At times these measures have been criticized as being excessive and too costly. In this paper we make an attempt to understand the optimal response to an infectious disease. We find that the observed policies are very close to a simple welfare maximization problem of a planner who tries to stop the diffusion of the disease. These extreme measures seem optimal in spite of the high output cost that it may have in the short run, and for various curvatures of the welfare function. The desire for cost smoothing reduces the intensity of the optimal quarantine while extending it for longer, but it still amounts to reducing economic activity by at least 40%. We then study the possibility of either complementing or substituting the quarantine policy with random testing. We find that testing is a very close substitute of quarantine and can substantially reduce the need for indiscriminate quarantines.