A Macroeconomic Model of Healthcare Saturation, Inequality & the Output-Pandemia Tradeo

Enrique Mendoza, Eugenio Rojas, Linda L. Tesar () and Jing Zhang
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Linda L. Tesar: University of Michigan and NBER

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: COVID-19 became a global health emergency when it threatened the catastrophic collapse of health systems as demand for health goods and services and their relative prices surged. Gov-ernments responded with lockdowns and increases in transfers. Empirical evidence shows that lockdowns and healthcare saturation contribute to explain the cross-country variation in GDP drops even after controlling for COVID-19 cases and mortality. We explain this output-pandemia tradeo? as resulting from a shock to subsistence health demand that is larger at higher capital utilization in a model with entrepreneurs and workers. The health system moves closer to sat-uration as the gap between supply and subsistence narrows, which worsens consumption and income inequality. An externality distorts utilization, because firms do not internalize that lower utilization relaxes healthcare saturation. The optimal policy response includes lockdowns and transfers to workers. Quantitatively, strict lockdowns and large transfer hikes can be optimal and yield sizable welfare gains because they prevent a sharp rise in inequality. Welfare and output costs vary in response to small parameter changes or deviations from optimal policies. Weak lockdowns coupled with weak transfers programs are the worst alternative and yet are in line with what several emerging and least developed countries have implemented.

Pages: 49 pages
Date: 2020-12-14
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Citations: View citations in EconPapers (3)

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Working Paper: A Macroeconomic Model of Healthcare Saturation, Inequality & the Output-Pandemia Tradeoff (2021)
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