Discussion paper

DP16112 Lockdowns as options

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.

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Citation

van Wijnbergen, S (2021), “DP16112 Lockdowns as options”, CEPR Press Discussion Paper No. 16112. https://new.cepr.org/publications/dp16112