Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt

Bibliographic Information

NBER Working Paper No. 26882
Issued in March 2020, Revised in April 2020
NBER Program(s):EFG, HE, PE

This paper was revised on April 20, 2020

Available Formats


We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people’s decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the U.S.

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