The Intergenerational Welfare Implications of Disease Contagion

Using endogenous, age-dependent measures of the value of statistical lives (VSL), this paper examines the demographic implications of recessions driven by disease contagions. Depending on the age-distribution mortality profile of the disease, long-run welfare losses resulting from the recession may outweigh lost VSL’s directly attributable to the disease. This is because disease contagions that induce high levels of hospitalization simultaneously impact aggregate output, via a recession caused by social-distancing, and the productivity of health care services. The efficiency of health investment falls driving down life expectancy (LE). VSL’s fall both because LE’s fall and the marginal value of health care investment falls. Using the Hall and Jones (2007) model of age-specific, endogenous health investment, it is shown that the COVID-19 crisis of 2020 will lead to lost welfare for young agents that exceeds VSL’s lost from the disease. If COVID-19 had the same age-mortality profile as the 1918 Spanish Flu, where more young agents died, contagion-mitigation policies that cause deep recessions would still be socially optimal since more of the high-valued lives of young people would be saved