DP16384 Pandemic Lockdown: The Role of Government Commitment

Author(s): Christian Moser, Pierre Yared
Publication Date: July 2021
Date Revised: July 2021
Keyword(s): Commitment and Flexibility, Coronavirus, COVID-19, lockdown, Non-Pharmaceutical Interventions, optimal policy, Pandemic Restrictions, rules, SARS-CoV-2, SIRD model
JEL(s): E61, H12, I18
Programme Areas: Labour Economics, Public Economics, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16384

This paper studies lockdown policy in a dynamic economy without government commitment. Lockdown imposes a cap on labor supply, which improves health prospects at the cost of economic output and consumption. A government would like to commit to the extent of future lockdowns in order to guarantee an economic outlook that supports efficient levels of investment into intermediate inputs. However, such a commitment is not credible, since investments are sunk at the time when the government chooses a lockdown. As a result, lockdown under lack of commitment deviates from the optimal policy. Rules that limit a government's lockdown discretion can improve social welfare, even in the presence of noncontractible information. Quantitatively, lack of commitment causes lockdown to be significantly more severe than is socially optimal. The output and consumption loss due to lack of commitment is greater for higher intermediate input shares, higher discount rates, higher values of life, higher disease transmission rates at and outside of work, and longer vaccine arrival times.