Expectations, Infections, and Economic Activity
This paper develops a quantitative theory of how people weigh the risks of infections against the benefits of engaging in social interactions that contribute to the spread of infectious diseases. Our framework takes into account the interrelated yet distinct effects of public policies and private behavior on the spread of the disease. We evaluate the model using a novel micro data set on consumption expenditures in Portugal. The estimated model accounts for the cross-sectional consumption response of individuals of different ages at a given time, as well as the time-series response of consumption of the young and old across the first three waves of Covid. Our model highlights the critical role of expectations in shaping how human behavior influences the dynamics of epidemics.
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