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The Hammer and the Dance: Equilibrium and Optimal Policy during a Pandemic Crisis

Assenza, Tiziana, Collard, Fabrice, Dupaigne, Martial, Fève, Patrick, Hellwig, Christian, Kankanamge, Sumudu and Werquin, Nicolas (2020) The Hammer and the Dance: Equilibrium and Optimal Policy during a Pandemic Crisis. TSE Working Paper, n. 20-1099, Toulouse

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We develop a comprehensive framework for analyzing optimal economic policy during a
pandemic crisis in a dynamic economic model that trades off pandemic-induced mortality costs
against the adverse economic impact of policy interventions. We use the comparison between
the planner problem and the dynamic decentralized equilibrium to highlight the margins of
policy intervention and describe optimal policy actions. As our main conclusion, we provide a
strong and novel economic justification for the current approach to dealing with the pandemic,
which is different from the existing health policy rationales. This justification is based on a
simple economic concept, the shadow price of infection risks, which succinctly captures the static
and dynamic trade-offs and externalities between economic prosperity and mortality risk as the
pandemic unfolds.

Item Type: Monograph (Working Paper)
Language: English
Date: May 2020
Place of Publication: Toulouse
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 11 May 2020 10:31
Last Modified: 03 Jun 2020 12:45
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