This paper presents a model economy which entails two heterogenous sectors, proxying the social and non-social industries. When the Covid-19 pandemic starts, households optimally cut consumption and labor from the social/contact sector to reduce their risk of contagion, reallocating part of their demand to the safer non-social sector. This reallocation leads to substantially different patterns in sectoral entry and exit, which are found in the data. Since the sectors are populated by heterogenous firms, alterations on the extensive margin affect the average productivity of the industry. Robustness checks through policy experiments as well as cross-country analyses corroborate our claims.
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