Beyond Covid-19, there is a growing interest in what economic structures will be needed to face ongoing pandemics. In this paper, we focus on the diagnostic problem and examine a new paradigm of voluntary self-testing by private individuals. We develop a dynamic model where individuals without symptoms face daily choices of either taking the risk of going out (to work and socialize), staying at home in self-isolation, or using a test to verify whether they are infected before going out. Our central insight is that the equilibrium public infection risk falls when home-based testing becomes cheaper and easier to use, even if they generate both false-positive (type I error) and false-negative (type II error) test outcomes. We also show that the presence of naïve individuals actually reduces the equilibrium infection risk in the economy. Overall our model shows that, even if inaccurate, home-based tests are vital for an economy facing an ongoing pandemic.
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