DP14613 Optimal COVID-19 Quarantine and Testing Policies

Author(s): Facundo Piguillem, Liyan Shi
Publication Date: April 2020
Date Revised: June 2021
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

During the COVID-19 pandemic, many countries have taken various measures, mostly "lockdowns," to contain and potentially eliminate the virus. In this paper, we study the optimality of such policies and whether lockdowns can be complemented or substituted with testing. To this end, we extend the epidemiological SEIR model, incorporating the information friction concerning virus carriers and testing technology. We find two main results, depending on whether testing is used. First, we show that two distinct types of optimal lockdown policies arise: suppression, consisting of closing down most of the economy for a period, and mitigation, consisting of shutting down a few activities for a relatively longer time span. Conditional on the policy type, the intensity and the duration are invariant to the properties of the welfare function: they depend only on the dynamics of the virus. Second, when incorporating testing, we find that testing is a very close substitute for lockdowns, substantially reducing the need for them to the point that they become unnecessary. By identifying carriers, testing contains the spread of the virus without the cost of lost output.