DP14750 A Dynamic Structural Model of Virus Diffusion and Network Production: A First Report

Author(s): Victor Aguirregabiria, Jiaying Gu, Yao Luo, Pedro Mira
Publication Date: May 2020
Keyword(s): COVID-19, Disease-Specific Public Health Interventions, dynamics, Production and social networks, Production externalities, Virus diffusion
JEL(s): C57, C73, I18, L14, L23
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14750

This paper presents a dynamic structural model to evaluate economic and public health effects of the diffusion of COVID-19, as well as the impact of factual and counterfactual public policies. Our framework combines a SIR epidemiological model of virus diffusion with a structural game of network production and social interactions. The economy comprises three types of geographic locations: homes, workplaces, and consumption places. Each individual has her own set of locations where she develops her life. The combination of these sets for all the individuals determines the economy's production and social network. Every day, individuals choose to work and consume either outside (with physical interaction with other people) or remotely (from home, without physical interactions). Working (and consuming) outside is more productive and generates stronger complementarities (positive externality). However, in the presence of a virus, working outside facilitates infection and the diffusion of the virus (negative externality). Individuals are forward-looking. We characterize an equilibrium of the dynamic network game and present an algorithm for its computation. We describe the estimation of the parameters of the model combining several sources of data on COVID-19 in Ontario, Canada: daily epidemiological data; hourly electricity consumption data; and daily cell phone data on individuals' mobility. We use the model to evaluate the health and economic impact of several counterfactual public policies: subsidies for working at home; testing policies; herd immunity; and changes in the network structure. These policies generate substantial differences in the propagation of the virus and its economic impact.