A Macroeconomic Model of Healthcare Saturation, Inequality and the Output-Pandemia Tradeoff

Mendoza, Enrique G.; Rojas, Eugenio; Tesar, Linda L.; Zhang, Jing

doi:10.21033/wp-2021-02

Working Paper

A Macroeconomic Model of Healthcare Saturation, Inequality and the Output-Pandemia Tradeoff

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. Governments 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 tradeoff 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 saturation 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.

Keywords: Covid-19; lockdowns; externality; transfers;

JEL Classification: E13; H23; I14;

https://doi.org/10.21033/wp-2021-02