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A SIR Macro Model: Comparing the Decentralized Economy and the Optimal Policy

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  • Alejandro Rodríguez

Abstract

We present a Simple SIR Macro Model to study the economic impact of an epidemic in a model were agent types are unobservable. We solve for the decentralized economy equilibrium and for optimal solution (subject to the constraint that the planner cannot differentiate between agent types). We find that decentralized economy produces an endogenous lock-down in which economic activity decreases. We find that the decentralized economy will begin its lock-down sooner than what the optimal policy prescribes because agents have an incentive to selfishly avoid infection while waiting for others to get infected, recover and contribute to herd-immunity. The optimal policy in this model is not necessarily about forcing people to stay at home but to force people to get infected early on.

Suggested Citation

  • Alejandro Rodríguez, 2020. "A SIR Macro Model: Comparing the Decentralized Economy and the Optimal Policy," Asociación Argentina de Economía Política: Working Papers 4399, Asociación Argentina de Economía Política.
    • Handle: RePEc:aep:anales:4399
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    File URL: https://aaep.org.ar/works/works2020/Rodriguez.pdf
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    More about this item

    Keywords

    Epidemic; COVID-19; recessions; lock-down; SIR macro model;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • I1 - Health, Education, and Welfare - - Health
    • H0 - Public Economics - - General

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