Pandemic Lockdown: The Role of Government Commitment
Working Paper 27062
DOI 10.3386/w27062
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This paper studies optimal lockdown policies in a dynamic economy without government commitment. A lockdown imposes a cap on labor supply, which lowers economic output but improves health prospects. A government would like to commit to limit the extent of future lockdowns in order to increase investment by supporting a more optimistic economic outlook. However, such a commitment may not be credible since investment decisions are sunk at the time when the government decides on lockdowns. Rules that limit a government’s future policy discretion can improve the efficiency of lockdowns, even in the presence of noncontractible information.