DP8112 Recurrent Infection and Externalities in Prevention

Author(s): Flavio Toxvaerd
Publication Date: November 2010
Keyword(s): Economic epidemiology, Preventive behavior, Rational disinhibition, Risk compensation
JEL(s): C73, I18
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8112

This paper studies a model of disease propagation in which agents can control their exposure to infection by engaging in costly preventive behavior. Agents are assumed to be fully rational, strategically sophisticated and forward-looking. I show that on the transition path, optimal behavior is Markovian, stationary and myopic and there are no contemporaneous externalities. In steady state, in which infection is endemic, there are strategic substitutes. Individuals over-expose themselves to infection, leading to sub-optimally high steady state disease prevalence. Infectivity-reducing measures such as pre-exposure prophylaxis lead to strictly worse steady state levels of disease prevalence. While revealed preferences show that the first-best level of welfare must increase, rational disinhibition, which makes increased exposure to infection a rational response to such measures, may lead to decreased welfare under decentralization.