Infectious Diseases, Human Capital and Economic Growth

This paper investigates the joint determination of the transmission of infectious diseases, human capital accumulation and economic growth. We develop an economic epidemiological model by incorporating SIS epidemiological model into an endogenous growth model with human capital accumulation. Households choose how much to invest in human and physical capital, as well as in controlling the risk of infection. If an individual is infected, he is incapacitated and can neither work nor accumulate human capital. 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. In the decentralized economy households fail to internalize the externality associated with controlling diseases. We further characterize the optimal solution and the subsidy that will decentralize it. With the optimal public health policy, economies are more likely to take off or grow at a higher rate. We show that there can be underinvestment in preventive health expenditures, and perversely for countries that are most afflicted with diseases and in a poverty trap, the optimal subsidy is lower than for growing economies. The poor health conditions are not only the result of tighter budget constraints, but more importantly the lack of incentives for investing in health capital.