The effect of social distancing on the reach of an epidemic in social networks

How does social distancing affect the reach of an epidemic in social networks? We present Monte Carlo simulation results of a susceptible–infected–removed with social distancing model. The key feature of the model is that individuals are limited in the number of acquaintances that they can interact with, thereby constraining disease transmission to an infectious subnetwork of the original social network. While increased social distancing typically reduces the spread of an infectious disease, the magnitude varies greatly depending on the topology of the network, indicating the need for policies that are network dependent. Our results also reveal the importance of coordinating policies at the ‘global’ level. In particular, the public health benefits from social distancing to a group (e.g. a country) may be completely undone if that group maintains connections with outside groups that are not following suit.

     

Learning versus habit formation: Optimal timing of lockdown for disease containment

We analyze a model where the government has to decide whether to impose a lockdown in a country to prevent the spread of a possibly virulent disease. If the government decides to impose a lockdown, it has to determine its intensity, timing and duration. We find that there are two competing effects that push the decision in opposite directions. An early lockdown is beneficial not only to slow down the spread of the disease, but creates beneficial habit formation (such as social distancing, developing hygienic habits) that persists even after the lockdown is lifted. Against this benefit of an early lockdown, there is a cost from loss of information about the virulence and spread of the disease in the population in addition to a direct cost to the economy. Based on the prior probability of the disease being virulent, we characterize the timing, intensity and duration of a lockdown with the above mentioned tradeoffs. Specifically, we show that as the precision of learning goes up, a government tends to delay the imposition of lockdown. Conversely, if the habit formation parameter is very strong, a government is likely to impose an early lockdown.     

Taming the spread of an epidemic by lockdown policies

We study the problem of a policymaker who aims at taming the spread of an epidemic while minimizing its associated social costs. The main feature of our model lies in the fact that the disease’s transmission rate is a diffusive stochastic process whose trend can be adjusted via costly confinement policies. We provide a complete theoretical analysis, as well as numerical experiments illustrating the structure of the optimal lockdown policy. In all our experiments the latter is characterized by three distinct periods: the epidemic is first let to freely evolve, then vigorously tamed, and finally a less stringent containment should be adopted. Moreover, the optimal containment policy is such that the product “reproduction number $\times$ percentage of susceptible” is kept after a certain date strictly below the critical level of one, although the reproduction number is let to oscillate above one in the last more relaxed phase of lockdown. Finally, an increase in the fluctuations of the transmission rate is shown to give rise to an earlier beginning of the optimal lockdown policy, which is also diluted over a longer period of time.     

Optimal dividend policy with random interest rates

Several recent papers have studied the impact of macroeconomic shocks on the financial policies of firms. However, they only consider the case where these macroeconomic shocks affect the profitability of firms but not the financial markets conditions. We study the polar case where the profitability of firms is stationary, but interest rates and issuance costs are governed by an exogenous Markov chain. We characterize the optimal dividend policy and show that these two macroeconomic factors have opposing effects: all things being equal, firms distribute more dividends when interest rates are high and less when issuing costs are high.     

Self-isolation

We analyze the spread of an infectious disease in a population when individuals strategically choose how much time to interact with others. Individuals are either of the severe type or of the asymptomatic type. Only severe types have symptoms when they are infected, and the asymptomatic types can be contagious without knowing it. In the absence of any symptoms, individuals do not know their type and continuously tradeoff the costs and benefits of self-isolation on the basis of their belief of being the severe type. We show that all equilibria of the game involve social interaction, and we characterize the unique equilibrium in which individuals partially self-isolate at each date. We calibrate our model to the COVID-19 pandemic and simulate the dynamics of the epidemic to illustrate the impact of some public policies.     

Policy modes,firms and the natural environment

This paper examines how different environmental policy types differentially impact firms and why firms vary in their responses to such policies. Based on the mechanisms embedded in policy instruments to create incentives for firms to comply, the characteristics of benefits/costs that policies impose on firms and the institutional context in which policy instruments were created and are sustained, the paper identifies five policy categories. These are category I (command and control), category II (market based), category III (mandatory information disclosures), category IV (business–government partnerships) and category V (private voluntary codes). Different policy types often bestow asymmetrical benefits/costs on firms. Some benefits/costs may constitute ‘private/club goods’ while others may constitute ‘public goods’. Drawing insights from public policy literature, the paper argues that firms can be expected to favor policies whose benefits have the characteristics of private/club goods but the costs of public goods. Thus, understanding the nature of benefits/costs (private/club versus public) and the magnitude of their excludability is critical in explaining the variations in firms' responses. To understand how managers perceive the nature of benefits/costs (monetary as well as non‐monetary), the paper draws on theories and perspectives in the business and public policy field. In doing so, the paper examines the ‘demand’ and the ‘supply’ sides as well as the market and non‐market environments of a given policy. Thus, the paper makes a case for a multi‐theoretic approach to understand variations in managerial assessments of benefits/costs, and consequently variations in their responses to various policy types. Copyright © 2004 John Wiley & Sons, Ltd and ERP Environment.     

An escape time interpretation of robust control

This paper studies the problem of an agent who wants to prevent the state from exceeding a critical threshold. Even though the agent is presumed to know the model, the optimal policy is computed by solving a conventional robust control problem. That is, robustness is induced here by objectives rather than uncertainty, and so is an example of the duality between risk-sensitivity and robustness. However, here the agent only incurs costs upon escape to a critical region, not during ‘normal times’. We argue that this is often a more realistic model of macroeconomic policymaking.     

Latent social distancing: Identification,causes and consequences

It is not directly observable how effectively a society practices social distancing during the COVID-19 pandemic. This paper proposes a novel and robust methodology to identify latent social distancing at the country level. We extend the Susceptible-Exposed-Infectious-Recovered-Deceased (SEIRD) model with a time-varying, country-specific distancing term, and derive the Model-Inferred DIStancing index (MIDIS) for 120 countries using readily available epidemiological data. The index is not sensitive to measurement errors in epidemiological data and to the values assigned to model parameters. The evolution of MIDIS shows that countries exhibit diverse patterns of distancing during the first wave of the COVID-19 pandemic—a persistent increase, a trendless fluctuation, and an inverted U are among these patterns. We then implement regression analyses using MIDIS and obtain the following results: First, MIDIS is strongly correlated with available mobility statistics, at least for high income countries. Second, MIDIS is also strongly associated with (i) the stringency of lockdown measures (governmental response), (ii) the cumulative number of deceased persons (behavioral response), and (iii) the time that passed since the first confirmed case (temporal response). Third, there is statistically significant regional variation in MIDIS, and more developed societies achieve higher distancing levels. Finally, MIDIS is used to explain output losses experienced during the pandemic, and it is shown that there is a robust positive relationship between the two, with sizable economic effects.     

Agent-based financial markets and New Keynesian macroeconomics: a synthesis

We combine a simple agent-based model of financial markets and a New Keynesian macroeconomic model with bounded rationality via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of business cycles and stock price bubbles. We show that market sentiments exert important influence on the macroeconomy: Impulse-response functions of macroeconomic variables become more volatile which makes the effect of a given shock hard to predict. We also analyze the impact of different types of financial transaction taxes that are currently debated among policy makers (FTT, FAT, progressive FAT) and find that such taxes are well suited to stabilize the economy and raise funds from the financial sector as a contribution to the enormous costs created during the recent crisis. Our simulations suggest that the FTT leads to higher tax revenues and better stabilization results then the FAT. However, the FTT might also create huge distortion if set too high, a threat which the FAT does not imply.     

MACROECONOMIC POLICY EVALUATION AND OPTIMAL CONTROL THEORY: A CRITICAL REVIEW OF SOME RECENT DEVELOPMENTS

Abstract. This survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design. This literature focuses on strategic interactions between governments and private agents engaged in dynamic non-cooperative games and emphasizes such issues as precommitment, credibility and reputation as important and endemic aspects of optimal policy design. A dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single-stage full-information games without commitment. This may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium. The type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players'beliefs under uncertainty. Included here are separating and pooling equilibria, involving notions of learning, signalling and information revelation. Additional dimensions exist in stochastic systems which introduce other forms of uncertainty. Optimal control and game theory have also been applied to international macroeconomic policy design, with emphasis on the potential costs and benefits of non-cooperative and cooperative behaviour between countries and problems of international policy coordination.     

Infectious diseases and economic growth

This paper develops a framework to study the economic impact of infectious diseases by integrating epidemiological dynamics into a neo-classical growth model. There is a two way interaction between the economy and the disease: the incidence of the disease affects labor supply, and investment in health capital can affect the incidence and recuperation from the disease. Thus, both the disease incidence and the income levels are endogenous. The disease dynamics make the control problem non-convex thus usual optimal control results do not apply. We establish existence of an optimal solution, continuity of state variables, show directly that the Hamiltonian inequality holds thus establishing optimality of interior paths that satisfy necessary conditions, and of the steady states. There are multiple steady states and the local dynamics of the model are fully characterized. A disease-free steady state always exists, but it could be unstable. A disease-endemic steady state may exist, in which the optimal health expenditure can be positive or zero depending on the parameters of the model. The interaction of the disease and economic variables is non-linear and can be non-monotonic.     

Environmental policy implications of extreme variations in pollutant stock levels and socioeconomic costs

This paper uses a real options approach to examine the impact of abrupt increases in carbon dioxide emissions and pollutant-related socio-economic costs. It derives optimal investment rules in the form of critical values for both pollutant stock levels and social costs, above which environmental policies should be adopted. Moreover, it determines the optimal emissions abatement level. Our analysis extends the methodology of Pindyck (2000) using jump diffusion processes. We show that if the stock of pollutant is subject to extreme variations and the emissions abatement level is chosen exogenously by the policymaker, then lower levels of the pollutant stock are required to trigger policy adoption. A similar, yet more prominent, effect is observed under the assumption that pollutant-related socio-economic costs and benefits are expected to exhibit abrupt changes. However, different results are obtained when we examine simultaneously the two interrelated decisions, namely, the optimal threshold of emissions abatement and the optimal abatement level. In this case, an increase in the size and/or probability of a jump increases the critical values of both pollutant stock levels and socio-economic costs but leads to higher optimal abatement.     

Analyzing the emotional impact of COVID-19 with Twitter data: Lessons from a B-VAR analysis on Italy

The novel coronavirus 2019 revolutionized the way of living and the communication of people making social media a popular tool to express concerns and perceptions. Starting from this context we built an original database based on the Twitter users’ emotions shown in the early weeks of the pandemic in Italy. Specifically, using a single index we measured the feelings of four groups of stakeholders (journalists, people, doctors, and politicians), in three groups of Italian regions (0,1,2), grouped according to the impact of the COVID-19 crises as defined by the Conte Government Ministerial Decree (8^th March 2020). We then applied B-VAR techniques to analyze the sentiment relationships between the groups of stakeholders in every Region Groups. Results show a high influence of doctors at the beginning of the epidemic in the Group that includes most of Italian regions (Group 0), and in Lombardy that has been the region of Italy hit the most by the pandemic (Group 2). Our outcomes suggest that, given the role played by stakeholders and the COVID-19 magnitude, health policy interventions based on communication strategies may be used as best practices to develop regional mitigation plans for the containment and contrast of epidemiological emergencies.     

Impact of treatment heterogeneity on drug resistance and supply chain costs

The efficacy of scarce drugs for many infectious diseases is threatened by the emergence and spread of resistance. Multiple studies show that available drugs should be used in a socially optimal way to contain drug resistance. This paper studies the tradeoff between risk of drug resistance and operational costs when using multiple drugs for a specific disease. Using a model for disease transmission and resistance spread, we show that treatment with multiple drugs, on a population level, results in better resistance-related health outcomes, but more interestingly, the marginal benefit decreases as the number of drugs used increases. We compare this benefit with the corresponding change in procurement and safety stock holding costs that result from higher drug variety in the supply chain. Using a large-scale simulation based on malaria transmission dynamics, we show that disease prevalence seems to be a less important factor when deciding the optimal width of drug assortment, compared to the duration of one episode of the disease and the price of the drug(s) used. Our analysis shows that under a wide variety of scenarios for disease prevalence and drug cost, it is optimal to simultaneously deploy multiple drugs in the population. If the drug price is high, large volume purchasing discounts are available, and disease prevalence is high, it may be optimal to use only one drug. Our model lends insights to policy makers into the socially optimal size of drug assortment for a given context.     

National sovereignty and consumer sovereignty: Some consequences of Brazil’s economic opening

Brazil’s move toward greater openness in its foreign trade and capital account since the 1980s, reflects a weakening of the exercise of national sovereignty for economic objectives. In this paper, we argue that consumer sovereignty has been correspondingly increased. There are costs and benefits to Brazil from both kinds of sovereignty. Increasing constraints on macroeconomic policy making have been accompanied by an increase in the choices open to many individuals. The latter increase, however, has been limited by a highly skewed distribution of income, which has persisted despite the profound changes in economic policy.     

The intensity of incentives in firms and markets: Moral hazard with envious agents

While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. This paper offers an explanation for this observation based on the assumption that agents are envious and suffer utility losses if others receive higher wages. We analyze the impact of envy on optimal incentive contracts in a general moral hazard model and isolate the countervailing effects of envy on the costs of providing incentives. We show that envy creates a tendency towards flat-wage contracts if agents are risk-averse and there is no limited liability. Empirical evidence suggests that social comparisons are more pronounced among employees within firms than among individuals that interact in markets. Flat-wage contracts are then more likely to be optimal in firms.     

The Social Costs of Innovation Policy

Innovation policy is designed to produce social benefits by solving a market failure problem associated with private investment in new knowledge. Yet the social costs of these policy interventions are routinely ignored. We use the Djankov et al. (2003) institutional possibility frontier model to analyse the trade‐offs between the social costs of disorder and those of dictatorship that particular innovation policies impose. We show how different innovation policies impose different types of social costs. We conclude that the case for public support for innovation policies is often both distorted and overstated because of failure to account for social costs.     

Social dumping and relocation: is there a case for imposing a social clause?

Public opinion in Europe seems worried about the relocation of production plants toward low wage countries often accused of practicing ‘social dumping’. To reduce the incentives for relocation trade unions proposed the adoption of ‘social clauses’ protecting domestic markets from commodities produced in countries where minimal labor condition are not met. We analyze the effects of the adoption of a social clause in a vertically differentiated Bertrand duopoly. We assess how such a policy affects firms’ relocation decisions in order to be able to assess its welfare implications. We also characterize the optimal social clause policy, both under domestic welfare maximization, and from an efficiency point of view. While we show that a social clause policy cannot be dismissed on domestic (or world) welfare grounds, its case is weaker the higher is the domestic wage and the lower is the foreign wage.     

Portfolio diversification and systemic risk in interbank networks

This paper contributes to a growing literature on the ambiguous effects of risk diversification. In our model, banks hold claims on each other’s liabilities that are marked-to-market on the individual financial leverage of the obligor. The probability of systemic default is determined using a passage-problem approach in a network context and banks are able to internalize the network externalities of contagion through their holdings. Banks do not internalize the social costs to the real economy of a systemic default of the banking system. We investigate the optimal diversification strategy of banks in the face of opposite and persistent economic trends that are ex-ante unknown to banks. We find that the optimal level of risk diversification may be interior or extremal depending on banks exposure the external assets and that a tension arises whereby individual incentives favor a banking system that is over-diversified with respect to the level of diversification that is desirable in the social optimum.