Health versus Wealth: On the Distributional Effects of Controlling a Pandemic

To slow the spread of the COVID-19 virus, many countries shut down parts of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have most to lose. We build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young, retired), by sector (basic, luxury), and by health status. Disease transmission occurs in the workplace, through consumption, at home, and in hospitals. We study the optimal economic mitigation policy for a government that can redistribute through taxes and transfers, but where taxation distorts labor supply. We show that shutdowns are optimally milder in 2020 when taxes are distortionary, and when the government does not have access to debt. A harder but shorter shutdown is preferred when vaccines become available in the first half of 2021.