Research

Working Papers

Vaccine Progress, Stock Prices, and the Value of Ending the Pandemic, with Viral Acharya, Timothy Johnson and Suresh Sundaresan, March 2023

Abstract: One measure of the ex ante cost of disasters is the welfare gain from shortening their expected duration. We introduce a stochastic clock into a standard disaster model that summarizes information about progress (positive or negative) towards disaster resolution. We show that the stock market response to duration news is essentially a sufficient statistic to identify the welfare gain to interventions that alter the state. Using information on clinical trial progress during 2020, we build contemporaneous forecasts of the time to vaccine deployment, which provide a measure of the anticipated length of the COVID-19 pandemic. The model can thus be calibrated from market reactions to vaccine news, which we estimate. The estimates imply that ending the pandemic would have been worth from 5% to 15% of total wealth as the expected duration varied in this period.

Disasters with Unobservable Duration and Frequency: Intensified Responses and Diminished Preparedness, with Viral Acharya, Timothy Johnson and Suresh Sundaresan, March 2023

Abstract: We study an economy subject to recurrent disasters when agents have imprecise information about the frequency and duration of the disasters. Uncertainty about the persistence of states can lead to seemingly pessimistic behavior in bad times and optimistic behavior in good times. In a disaster, uncertainty about duration acts as an amplification mechanism. Agents alter their optimal investment and consumption more intensely relative to the full- information benchmark, and the welfare cost of parameter uncertainty can be extreme. However, in advance of a disaster, uncertainty about the arrival rate can be welfare-increasing and agents exhibit diminished preparedness: they optimally invest less in mitigation than under full information and pay less for insurance against the next disaster.