The hammer and the scalpel: On the economics of indiscriminate versus targeted isolation policies during pandemics

We develop a simple dynamic economic model of epidemic transmission designed to be consistent with widely used biological models of the transmission of epidemics, while incorporating economic benefits and costs as well. Our main finding is that if the technology for tracking infected individuals is sufficiently good, targeted testing and isolation policies deliver large welfare gains relative to optimal policies when these tools are not available. Much of this welfare gain comes from isolating infected individuals rather than testing them. When the tracking technology is not very good, the gains from targeted testing and isolation are small. The message of our analysis is that the returns to improving tracking technologies are very large.