Lockdowns as options

Sweder van Wijnbergen

No 16112, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The irreversibility of dying coupled with gradual information acquisition over time on the likely arrival and eventual effectiveness of vaccines confers a real option value to lockdown strategies that delay the incidence of a pandemic. We show the analogy to binary options and provide a pricing formula quantifying the option value embedded in a stochastic vaccine arrival process. The case for lockdown strategies becomes stronger the more likely vaccine discovery is, and the less uncertainty exists about its effectiveness.

Keywords: Pandemic dynamics; Stochastic vaccination arrival information; Irreversibility; Lockdowns; Real options (search for similar items in EconPapers)
JEL-codes: G12 G13 G18 (search for similar items in EconPapers)
Date: 2021-05
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