On the distributional consequences of epidemics

We develop a tractable general theory for the study of the economic and demographic impact of epidemics, notably its distributional consequences. To this end, we build up a three-period overlapping generations model where altruistic parents choose optimal health expenditures for their children and themselves. The survival probability of adults and children depends on such investments. Agents can be skilled or unskilled. In this paper, epidemics are modeled as one-period exogenous shocks to the adults' survival rates. We first show that such epidemics have permanent effects on the size of population and on the level of output. However, the income distribution is shown to be unaltered in the long-run. Second, we show that this distribution may be significantly altered in the medium-term: in particular, the proportion of the unskilled will necessarily increase at that term if orphans are too penalized in the access to education. (C) 2009 Elsevier B.V. All rights reserved.