On the Distributional Consequences of Epidemics

We develop a tractable general theory for the study of the economic and demographic impact of epidemics, and notably its distributional consequences. To this end, we develop a three-period overlapping generations model where altruistic parents choose optimal health expenditures for their children and themselves. The survival probability of (junior) adults and children depends on such investments. Agents can be skilled or unskilled. The model emphasizes the role of orphans. Orphans are not only penalized in the face of death, they are also penalized in the access to education. Epidemics are modeled as one period exogenous shocks to the survival rates. We specifically study the consequence of a negative shock on adult survival rates in the first period. We prove that while the epidemic has no permanent effect on income distribution, it can perfectly alter it in the short and medium run. In particular, the epidemic may imply a worsening in the short and medium run of both economic performance and income distribution. Two opposite mechanisms are isolated: first, the survival rate of children at the end of the first period decreases relatively more in poor than in wealthy families. This decreases the proportion of junior adults with a low endowment of human capital in period 2. Secondly, the number of orphans in period 1 increases in both families. This decreases the proportion of junior adults with a low endowment of human capital in period 2. Therefore, the proportion of the unskilled will necessarily increase in the medium run if orphans are too penalized in the access to a high level of education.