DP15482 Pandemic Recessions and Contact Tracing

Author(s): Leonardo Melosi, Matthias Rottner
Publication Date: November 2020
Date Revised: March 2021
Keyword(s): Contact Tracing, Coordination failure, COVID-19, Epidemics, Externalities, infection chain, lockdown, Quarantine, SIR-macro model, Testing
JEL(s): D62, E10, I10
Programme Areas: Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15482

We study contact tracing in a new macro-epidemiological model in which infected agents may not show any symptoms of the disease and the availability of tests to detect asymptomatic spreaders is limited. Contact tracing is a testing strategy that aims to reconstruct the infection chain of newly symptomatic agents. We show that contact tracing may be insufficient to stem the spread of infections because agents fail to internalize that their individual consumption and labor decisions increase the number of traceable contacts to be tested in the future. Complementing contact tracing with timely, moderate lockdowns corrects this coordination failure, allowing policymakers to buy time to expand the testing scale so as to preserve the testing system. We provide theoretical underpinnings to the risk of becoming infected in macro-epidemiological models. Our methodology to reconstruct infection chains is not affected by curse-of-dimensionality problems.