Knowledge, Germs, and Output

To capture the dynamic interactions between knowledge diffusion and disease transmission, this paper models individuals' time allocation between learning and production. Learners and those who possess the frontier knowledge (teachers) are matched randomly. The contact rate increases in the amount of time allocated to learning, and an infected individual can transmit the pathogen to a susceptible individual in contact. An infection reduces the individual's effectiveness in learning and production. A recovery from an infection does not always come with immunity. I calibrate the pathogen to COVID-19 and start the economy in a situation where knowledge diffusion will generate 1.5% annual growth in output in the next 10 years. In a short time after the unexpected arrival of the pathogen, aggregate output drops by 13% and takes 30 weeks to recover. The death toll from infections reaches 1.2% of the population. If the society can test, trace and isolate infected leaners from the learning process, the welfare gain is 1.39% of the permanent output or, equivalently, 31.6% of the first year's output. A temporary lockdown delays the peak of infections and reduces the fall in output. Moreover, the transmission of the pathogen feeds on knowledge diffusion. If the economy starts in the steady state which has less knowledge diffusion, output drops by 4.4%, the death toll is 0.66%, and the welfare gain from controlling infections is 12.2% of the first year's output.