DISEASES AND DEVELOPMENT: A Theory of Infection Dynamics and Economic Behavior∗

We propose an economic theory of infectious disease transmission and rational behavior. Diseases are costly due to mortality (premature death) and morbidity (lower productivity and quality of life). The theory offers three main insights. First, higher disease prevalence implies lower saving-investment propensity. Preventive behavior can partially offset this when the prevalence rate and negative disease externality are relatively low. Secondly, infectious diseases can generate a low-growth trap where income alone cannot push an economy out of underdevelopment. This is distinctly different from development traps in the existing literature. Since income per se does not cause health in this equilibrium, successful interventions have to be health specific. Thirdly, a more favorable disease ecology propels the economy to a higher growth path where health and income co-evolve and infectious diseases disappear. Even so, diseases significantly slow down convergence. These results suggest the empirical relationship between health and income at the aggregate level may be more nuanced than realized. JEL Classification: O40, O47