Health and Economic Inequality During Pandemics

This paper studies the evolution of health and economic inequality during pandemics. It focuses on optimal preventive and treatment actions by agents who differ in their productivity, wealth and health status. Unlike the canonical Aiyagari-Bewley-Huggett framework where the income risk is exogenous, in our framework it is affected by individual choices and the endogenously determined economic and epidemiological variables. We have a heterogeneous agent continuous time (HACT) model where even if there are no exogenous productivity shocks the infection process introduces individual-level heterogeneity and macroeconomic level fluctuations due to the interaction of the infection process, the control decisions, and effects on economic variables such as labour productivity and capital. Consistent with the evidence from the Covid-19, income, wealth, and health (proxied by infection rates) inequality increase during pandemics. The increase in income inequality is temporary but that of wealth is persistent. The increase in inequalities is driven by the increasing elasticities of health expenditures with wealth. We characterise the policy functions, the stationary equilibrium distributions and simulate the transitional dynamics to stationary equilibrium. We also evaluate the effect of government’s income support scheme.