R<1 as an Economic Constraint
Review of Economic Design (Special Issue: The Economics of Epidemics), Conditionally Accepted. [PDF]Abstract
This paper proposes a novel pandemic response paradigm, and shows that it would have been the right middle ground between lockdown and ignore-the-virus for Covid-19: maximize social welfare subject to R ≤ 1 as a constraint. A simple graphical argument shows that this formulation is an approximately optimal way to balance socioeconomic and health objectives, because of a sharp kink in the benefits-of-risk-reduction curve at R = 1 (both the curve and its kink are novel to this paper). Two critical insights emerge from this approach to the pandemic. First, the R ≤ 1 constraint imposes a “risk budget” on society. Society should optimally spend this budget on the social and economic activities with the highest ratio of socioeconomic value to disease-transmission risk, with targeted activity bans for activities with too low a ratio of value-to-risk. For example, schools have a much higher ratio of valueto-risk than bars, so society should optimally spend its risk budget on schools over bars. Second, what I call “low-cost risk reducers” (LCRRs) can significantly improve activities’ value-to-risk ratios and hence significantly reduce the cost of satisfying the R ≤ 1 constraint. Examples of LCRRs for Covid-19 include rapid testing, high-quality facemasks, stay-home-if-sick rules and improved air circulation. A simple numerical example, based on estimates from the medical literature for R0 and the efficacy of LCRRs for Covid-19, suggests the potential gains from this paper’s approach to the pandemic would have been enormous—plausibly trillions of dollars and hundreds of thousands of lives in the United States alone.
Earlier Version
Nov 2020 NBER Working Paper No. w28093
NBER Working Paper No. w28093. Latest Draft: November 2020.April 1st 2020 draft: “R<1 as an Economic Constraint: Can we 'Expand the Frontier' in the Fight Against Covid-19?"
Slides, May 2020
Slides, April 9th 2020 “IGM Conference on the Covid-19 Crisis”
[PDF] [Slides] [All Related Material]
April 1st 2020 draft: “R<1 as an Economic Constraint: Can we 'Expand the Frontier' in the Fight Against Covid-19?"
University of Chicago, Becker Friedman Institute for Economics Working Paper.[PDF] [All Related Material]
