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Infectious diseases, human capital and economic growth

Author

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  • Aditya Goenka

    (University of Birmingham)

  • Lin Liu

    (University of Liverpool)

Abstract

Stylized facts show there is a clustering of countries in three balanced growth paths characterized by differing income/growth, human capital and incidence of infectious diseases. To explain this, we develop a dynamic general equilibrium model incorporating SIS epidemiology dynamics, where households choose how much to invest in human and physical capital, as well as in controlling the risk of infection. In the decentralized economy, households do not internalize the externality of controlling infection. There are multiple balanced growth paths where the endogenous prevalence of the disease determines whether human capital is accumulated or not, i.e., whether there is sustained economic growth or a poverty trap. We characterize the optimal public health policy that internalizes the disease externality and the subsidy that decentralizes it. Perversely, for countries in a poverty trap and most afflicted with diseases, the optimal subsidy is lower than for growing economies. We also study the quantitative effects of better control of diseases, and of increasing life expectancy on countries in a poverty trap.

Suggested Citation

  • Aditya Goenka & Lin Liu, 2020. "Infectious diseases, human capital and economic growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 1-47, July.
  • Handle: RePEc:spr:joecth:v:70:y:2020:i:1:d:10.1007_s00199-019-01214-7
    DOI: 10.1007/s00199-019-01214-7
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    More about this item

    Keywords

    Endogenous growth; Infectious diseases; Epidemiology; Poverty trap; Public health policy; Human capital;
    All these keywords.

    JEL classification:

    • E19 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Other
    • I10 - Health, Education, and Welfare - - Health - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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