Inequality aversion and government health expenditure

Abstract

This paper explores a behavioural mechanism through which income inequality may be associated with population health. We consider a model with heterogeneous agents in which agents' preferences are characterized by income inequality aversion. Our analysis shows that spending on health-producing goods is inversely related to the agents’ degree of inequality aversion. A Veblenesque mechanism drives this relation: inequality averse poor agents wish to enjoy consumption levels closer to the average consumption levels in the economy but can only do so by reducing their expenditures on health. This leads to adverse outcomes for individuals and adverse political economy implications for health. In the political economy context, agents characterized by high inequality aversion vote for lower levels of government health spending. To specifically test this mechanism, we construct empirical measures of inequality aversion. Then, using these measures for a panel of 147 countries spanning 2008–2019, we find a significant negative impact of inequality aversion on allocations of public spending for healthcare. These results remain robust to different model specifications.