Archives For incentives

Flattening the Curve without Squashing Society: Market Responses to COVID-19

Auer, Fruits & Stout —  10 April 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Fellow of Law & Economics, ICLE); Eric Fruits (Chief Economist, ICLE; Adjunct Professor of Economics, Portland State University); and Kristian Stout (Associate Director, ICLE ] 

The COVID-19 pandemic is changing the way consumers shop and the way businesses sell. These shifts in behavior, designed to “flatten the curve” of infection through social distancing, are happening across many (if not all) markets. But in many cases, it’s impossible to know now whether these new habits are actually achieving the desired effect. 

Take a seemingly silly example from Oregon. The state is one of only two in the U.S. that prohibits self-serve gas. In response to COVID-19, the state fire marshall announced it would temporarily suspend its enforcement of the prohibition. Public opinion fell into two broad groups. Those who want the option to pump their own gas argue that self-serve reduces the interaction between station attendants and consumers, thereby potentially reducing the spread of coronavirus. On the other hand, those who support the prohibition on self-serve have blasted the fire marshall’s announcement, arguing that all those dirty fingers pressing keypads and all those grubby hands on fuel pumps will likely increase the spread of the virus. 

Both groups may be right, but no one yet knows the net effect. We can only speculate. This picture becomes even more complex when considering other, alternative policies. For instance, would it be more effective for the state of Oregon to curtail gas station visits by forcing the closure of stations? Probably not. Would it be more effective to reduce visits through some form of rationing? Maybe. Maybe not. 

Policymakers will certainly struggle to efficiently decide how firms and consumers should minimize the spread of COVID-19. That struggle is an extension of Hayek’s knowledge problem: policymakers don’t have adequate knowledge of alternatives, preferences, and the associated risks. 

A Hayekian approach — relying on bottom-up rather than top-down solutions to the problem — may be the most appropriate solution. Allowing firms to experiment and iteratively find solutions that work for their consumers and employees (potentially adjusting prices and wages in the process) may be the best that policymakers can do.

The case of online retail platforms

One area where these complex tradeoffs are particularly acute is that of online retail. In response to the pandemic, many firms have significantly boosted their online retail capacity. 

These initiatives have been met with a mix of enthusiasm and disapproval. On the one hand online retail enables consumers to purchase “essential” goods with a significantly reduced risk of COVID-19 contamination. It also allows “non-essential” goods to be sold, despite the closure of their brick and mortar stores. At first blush, this seems like a win-win situation for both consumers and retailers of all sizes, with large retailers ramping up their online operations and independent retailers switching to online platforms such as Amazon.

But there is a potential downside. Even contactless deliveries do present some danger, notably for warehouse workers who run the risk of being infected and subsequently passing the virus on to others. This risk is amplified by the fact that many major retailers, including Walmart, Kroger, CVS, and Albertsons, are hiring more warehouse and delivery workers to meet an increase in online orders. 

This has led some to question whether sales of “non-essential” goods (though the term is almost impossible to define) should be halted. The reasoning is that continuing to supply such goods needlessly puts lives at risk and reduces overall efforts to slow the virus.

Once again, these are incredibly complex questions. It is hard to gauge the overall risk of infection that is produced by the online retail industry’s warehousing and distribution infrastructure. In particular, it is not clear how effective social distancing policies, widely imposed within these workplaces, will be at achieving distancing and, in turn, reducing infections. 

More fundamentally, whatever this risk turns out to be, it is almost impossible to weigh it against an appropriate counterfactual. 

Online retail is not the only area where this complex tradeoff arises. An analogous reasoning could, for instance, also be applied to food delivery platforms. Ordering a meal on UberEats does carry some risk, but so does repeated trips to the grocery store. And there are legitimate concerns about the safety of food handlers working in close proximity to each other.  These considerations make it hard for policymakers to strike the appropriate balance. 

The good news: at least some COVID-related risks are being internalized

But there is also some good news. Firms, consumers and employees all have some incentive to mitigate these risks. 

Consumers want to purchase goods without getting contaminated; employees want to work in safe environments; and firms need to attract both consumers and employees, while minimizing potential liability. These (partially) aligned incentives will almost certainly cause these economic agents to take at least some steps that mitigate the spread of COVID-19. This might notably explain why many firms imposed social distancing measures well before governments started to take notice (here, here, and here). 

For example, one first-order effect of COVID-19 is that it has become more expensive for firms to hire warehouse workers. Not only have firms moved up along the supply curve (by hiring more workers), but the curve itself has likely shifted upwards reflecting the increased opportunity cost of warehouse work. Predictably, this has resulted in higher wages for workers. For example, Amazon and Walmart recently increased the wages they were paying warehouse workers, as have brick and mortar retailers, such as Kroger, who have implemented similar policies.

Along similar lines, firms and employees will predictably bargain — through various channels — over the appropriate level of protection for those workers who must continue to work in-person.

For example, some companies have found ways to reduce risk while continuing operations:

  • CNBC reports Tyson Foods is using walk-through infrared body temperature scanners to check employees’ temperatures as they enter three of the company’s meat processing plants. Other companies planning to use scanners include Goldman Sachs, UPS, Ford, and Carnival Cruise Lines.
  • Kroger’s Fred Meyer chain of supermarkets is limiting the number of customers in each of its stores to half the occupancy allowed under international building codes. Kroger will use infrared sensors and predictive analytics to monitor the new capacity limits. The company already uses the technology to estimate how many checkout lanes are needed at any given time.
  • Trader Joe’s limits occupancy in its store. Customers waiting to enter are asked to stand six feet apart using marked off Trader Joe’s logos on the sidewalk. Shopping carts are separated into groups of “sanitized” and “to be cleaned.” Each cart is thoroughly sprayed with disinfectant and wiped down with a clean cloth.

In other cases, bargaining over the right level of risk-mitigation has been pursued through more coercive channels, such as litigation and lobbying:

  • A recently filed lawsuit alleges that managers at an Illinois Walmart store failed to alert workers after several employees began showing symptoms of COVID-19. The suit claims Walmart “had a duty to exercise reasonable care in keeping the store in a safe and healthy environment and, in particular, to protect employees, customers and other individuals within the store from contracting COVID-19 when it knew or should have known that individuals at the store were at a very high risk of infection and exposure.” 
  • According to CNBC, a group of legislators, unions and Amazon employees in New York wrote a letter to CEO Jeff Bezos calling on him to enact greater protections for warehouse employees who continue to work during the coronavirus outbreak. The Financial Times reports worker protests at Amazon warehouse in the US, France, and Italy. Worker protests have been reported at a Barnes & Noble warehouse. Several McDonald’s locations have been hit with strikes.
  • In many cases, worker concerns about health and safety have been conflated with long-simmering issues of unionization, minimum wage, flexible scheduling, and paid time-off. For example, several McDonald’s strikes were reported to have been organized by “Fight for $15.”

Sometimes, there is simply no mutually-advantageous solution. And businesses are thus left with no other option than temporarily suspending their activities: 

  • For instance, McDonalds and Burger King have spontaneously closed their restaurants — including drive-thru and deliveries — in many European countries (here and here).
  • In Portland, Oregon, ChefStable a restaurant group behind some of the city’s best-known restaurants, closed all 20 of its bars and restaurants for at least four weeks. In what he called a “crisis of conscience,” owner Kurt Huffman concluded it would be impossible to maintain safe social distancing for customers and staff.

This is certainly not to say that all is perfect. Employers, employees and consumers may have very strong disagreements about what constitutes the appropriate level of risk mitigation.

Moreover, the questions of balancing worker health and safety with that of consumers become all the more complex when we recognize that consumers and businesses are operating in a dynamic environment, making sometimes fundamental changes to reduce risk at many levels of the supply chain.

Likewise, not all businesses will be able to implement measures that mitigate the risk of COVID-19. For instance, “Big Business” might be in a better position to reduce risks to its workforce than smaller businesses. 

Larger firms tend to have the resources and economies of scale to make capital investments in temperature scanners or sensors. They have larger workforces where employees can, say, shift from stocking shelves to sanitizing shopping carts. Several large employers, including Amazon, Kroger, and CVS have offered higher wages to employees who are more likely to be exposed to the coronavirus. Smaller firms are less likely to have the resources to offer such wage premiums.

For example, Amazon recently announced that it would implement mandatory temperature checks, that it would provide employees with protective equipment, and that it would increase the frequency and intensity of cleaning for all its sites. And, as already mentioned above, Tyson Foods announced that they would install temperature scanners at a number of sites. It is not clear whether smaller businesses are in a position to implement similar measures. 

That’s not to say that small businesses can’t adjust. It’s just more difficult. For example, a small paint-your-own ceramics shop, Mimosa Studios, had to stop offering painting parties because of government mandated social distancing. One way it’s mitigating the loss of business is with a paint-at-home package. Customers place an order online, and the studio delivers the ceramic piece, paints, and loaner brushes. When the customer is finished painting, Mimosa picks up the piece, fires it, and delivers the finished product. The approach doesn’t solve the problem, but it helps mitigate the losses.

Conclusion

In all likelihood, we can’t actually avoid all bad outcomes. There is, of course, some risk associated with even well-resourced large businesses continuing to operate, even though some of them play a crucial role in coronavirus-related lockdowns. 

Currently, market actors are working within the broad outlines of lockdowns deemed necessary by policymakers. Given the intensely complicated risk calculation necessary to determine if any given individual truly needs an “essential” (or even a “nonessential”) good or service, the best thing that lawmakers can do for now is let properly motivated private actors continue to seek optimal outcomes together within the imposed constraints. 

So far, most individuals and the firms serving them are at least partially internalizing Covid-related risks. The right approach for lawmakers would be to watch this process and determine where it breaks down. Measures targeted to fix those breaches will almost inevitably outperform interventionist planning to determine exactly what is essential, what is nonessential, and who should be allowed to serve consumers in their time of need.

In Amazon, Apple, COVID-19, International, Law & Economics, Platforms, Symposia, The Law, Economics, and Policy of the COVID-19 Pandemic, Truth on the Market , , , , , , , , , ,
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Income-contingent Loans as a COVID Policy Backstop

Sam Bowman —  25 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Sam Bowman, (Director of Competition Policy, ICLE).]

No support package for workers and businesses during the coronavirus shutdown can be comprehensive. In the UK, for example, the government is offering to pay 80% of the wages of furloughed workers, but this will not apply to self-employed people or many gig economy workers, and so far it’s been hard to think of a way of giving them equivalent support. It’s likely that the bill going through Congress will have similar issues.

Whether or not solutions are found for these problems, it may be worth putting in place what you might call a ‘backstop’ policy that allows people to access money in case they cannot access it through the other policies that are being put into place. This doesn’t need to provide equivalent support to other packages, just to ensure that everyone has access to the money they need during the shutdown to pay their bills and rent, and cover other essential costs. The aim here is just to keep everyone afloat.

One mechanism for doing this might be to offer income-contingent loans to anyone currently resident in the country during the shutdown period. These are loans whose repayment is determined by the borrower’s income later on, and are how students in the UK and Australia pay for university. 

In the UK, for example, under the current student loan repayment terms, once a student has graduated, their earnings above a certain income threshold (currently £25,716/year) are taxed at 9% to repay the loan. So, if I earn £30,000/year and have a loan to repay, I pay an additional £385.56/year to repay the loan (9% of the £4,284 I’m earning above the income threshold); if I earn £40,000/year, I pay an additional £1,285.56/year. The loan incurs an annual interest rate equal to an annual measure of inflation plus 3%. Once you have paid off the loan, no more repayments are taken, and any amount still unpaid thirty years after the loan was first taken out is written off.

In practice, these terms mean that there is a significant subsidy to university students, most of whom never pay off the full amount. Under a less generous repayment scheme that was in place until recently, with a lower income threshold for repayment, out of every £1 borrowed by students the long-run cost to the government was 43.3p. This is regarded by many as a feature of the system rather than a bug, because of the belief that university education has positive externalities, and because this approach pools some of the risk associated with pursuing a graduate-level career (the risk of ending up with a low-paid job despite having spent a lot on your education, for example).

For loans available to the wider public, a different set of repayment criteria could apply. We could allow anyone who has filed a W-2 or 1099 tax statement in the past eighteen months (or filed a self-assessment tax return in the UK) to borrow up to something around 20% of median national annual income, to be paid back via an extra few percentage points on their federal income tax or, in the UK, National Insurance contributions over the following ten years, with the rate returning to normal after they have paid off the loan. Some other provision may have to be made for people approaching retirement.

With a low, inflation-indexed interest rate, this would allow people who need funds to access them, but make it mostly pointless for anyone who did not need to borrow. 

If, like student tuition fees, loans were written off after a certain period, low earners would probably never pay back the entirety of the ‘loan’ – as a one-off transfer (ie, one that does not distort work or savings incentives for recipients) to low paid people, this is probably not a bad thing. Most people, though, would pay back as and when they were able to. For self-employed people in particular, it could be a valuable source of liquidity during an unexpected period where they cannot work. Overall, it would function as a cash transfer to lower earners, and a liquidity injection for everyone else who takes advantage of the scheme.

This would have advantages over money being given to every US or UK citizen, as some have proposed, because most of the money being given out would be repaid, so the net burden on taxpayers would be lower and so the deadweight losses created by the additional tax needed to pay for it would be smaller. But you would also eliminate the need for means-testing, relying on self-selection instead.

The biggest obstacle to rolling something like this out may be administrative. However, if the government committed to setting up something like this, banks and credit card companies may be willing to step in in the short-run to issue short-term loans in the knowledge that people could be able to repay them once the government scheme was set up. To facilitate this, the government could guarantee the loans made by banks and credit card companies now, then allow people to opt into the income-contingent loans later, so there was no need for legislation immediately.

Speed is extremely important in helping people plug the gaps in their finances. As a complement to the government’s other plans, income-contingent loans to groups like self-employed people may be a useful way of catching people who would otherwise fall through the cracks.

In COVID-19, Credit Cards, Financial Regulation, International, Platforms, Regulation, The Law, Economics, and Policy of the COVID-19 Pandemic, Truth on the Market, Twitter, United Kingdom , , ,
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Subsidies to “Flatten the Curve”

Luke Froeb —  24 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Luke Froeb, (William C. Oehmig Chair in Free Enterprise and Entrepreneurship, Owen Graduate School of Management, Vanderbilt University; former Chief Economist at the US DOJ Antitrust Division and US FTC).]

Summary: Trying to quarantine everyone until a vaccine is available doesn’t seem feasible. In addition, restrictions mainly delay when the epidemic explodes, e.g., see previous post on Flattening the Curve. In this paper, we propose subsidies to both individuals and businesses, to better align private incentives with social goals, while leaving it up to individuals and businesses to decide for themselves which risks to take.

For example, testing would give individuals the information necessary to make the best decision about whether to shelter in place or, if they have recovered and are now immune, to come out.  But, the negative consequences of a positive test, e.g., quarantine, can deter people from getting tested. Rewards for those who present for a test and submit to isolation when they have active disease could offset such externalities.

Another problem is that many people aren’t free on their own to implement protective measures related to work. Some form of incentive for work from home, closing down production in some part, or extra protection for workers could be imagined for employers. Businesses that offer worker health care might be incentivized by sharing in the extra virus health care costs realized by workers in exchange for a health care subsidy.

Essay: In the midst of an epidemic it is evident that social policy must adjust in furtherance of the public good. Institutions of all sorts, not the least of which government, will have to take extraordinary actions. People should expect their relationships with these institutions to change, at least for some time. These adjustments will need to be informed by applicable epidemiological data and models, subject to the usual uncertainties. But the problems to be faced are not only epidemiological but economic. There will be tradeoffs to be made between safer, restrictive rules and riskier, unconstrained behaviors. Costs to be faced are both social and individual.  As such, we should not expect a uniform public policy to make suitable choices for all individuals, nor assume that individuals making good decisions for themselves will combine for a good social outcome.  Imagine instead an alternative, where social costs are evaluated and appropriate individual incentives are devised, allowing individuals to make informed decisions with respect to their own circumstances and the social externalities reflected in those incentives.

We are currently in the US at the beginning of the coronavirus epidemic.  This is not the flu. It is maybe ten times as lethal as the flu, perhaps a little more lethal proportionally in the most susceptible populations. It is new, so there is little or no natural immunity, and no vaccine available for maybe 18 months. Like the flu, there is no really effective treatment yet for those that become sickest, particularly because the virus is most deadly through the complications it causes with existing conditions, so treatment options should not perhaps be expected to help with epidemic spread or to reduce lethality. It is spread relatively easily from person to person, though not as easily as the measles, perhaps significantly before the infected person shows symptoms. And it may be that people can get the virus, become contagious and spread the disease, while never showing symptoms themselves. We now have a test for active coronavirus, though it is still somewhat hard to get in the US, and we can expect at some point in the near future to have an antibody test that will show when people either have or have had and recovered from the virus.

There are some obvious social and individual costs to people catching this virus. First there are the deaths from the disease. Then there are the costs of treating those ill. Finally, there are costs from the lost productivity of those fallen ill. If there is a sudden and extreme increase in the numbers of sick people, all of these costs can be expected to rise, perhaps significantly. When hospitals have patients in excess of existing capacity, expanding capacity will be difficult and expensive, and death rates can be expected to rise.

An ideal public health strategy in the face of an epidemic is to keep people from falling sick. At the beginning of the epidemic, the few people with the disease need to be found and quarantined, and those with whom they have had contact need to be traced and isolated so that any carrying the disease can be stopped from passing it on. If there is no natural reservoir of disease that reintroduces the disease, it may be possible to eradicate the disease. When there were few cases, this might have been practical, but that effort has clearly failed, and there are far too many carriers of the disease now to track. 

Now the emphasis must be on measures to reduce transmission of the disease. This entails modifying behaviors that facilitate the disease passing from person to person. If the rate of infection can be reduced enough, to the point where the number of people each infected person can be expected to infect is less than one on average, then the disease will naturally die out. Once most people have had the disease, or have been vaccinated, most of the people an infected person would have infected are immune so the rate of new infections will naturally fall to less than one and the disease will die out. Because so many people have immunity to many varieties of the flu, its spread can be controlled in particular through vaccination, the only difficulty being that new strains are appearing all of the time. The difficulty with coronavirus is that simple measures for reducing the spread of the disease do not seem to be effective enough and extreme measures will be much more expensive. Moreover, because the coronavirus is a pandemic, even if one region succeeds in reducing transmission and has the disease fade, reintroduction from other regions can be expected to relight the fire of epidemic. Measures for reducing transmission will need to be maintained for some time, likely until a vaccine is available or natural heard immunity is established through the majority of the population having had the disease.

The flu strikes every year and we seem to tolerate it without extreme measures of social distancing. Perhaps there’s nothing that needs to be done now, nothing worth doing now, to slow the coronavirus epidemic. But what would the cost of such an attitude be? The virus would spread like wildfire, infecting in a matter of months perhaps the majority of the population. Even with an estimate of 70 to 150 million Americans, at a 1% death rate that means 0.7 to 1.5 million would die. But that many cases all at once would overwhelm the medical system, and the intensive care required to keep the death rate even this low. A surge in cases might mean an increase in death rate.

At the other extreme, we seem to be heading into a period where everyone is urged to shelter-in-place, or required to be locked down, so as to reduce social contacts to near zero and thereby interrupt the spread of the virus. This may be effective, perhaps even necessary to prevent an immediate surge of demand on hospitals. But it is also expensive in the disruptions it entails. The number of active infections can be drastically reduced over a time scale corresponding to an individual’s course of the disease. Removing the restrictions would mean then that the epidemic resumes from the new lower level with somewhat more of the population already immune. It seems unlikely the disease can be eradicated by such measures because of the danger of reintroduction from other regions where the virus is active. The strategy of holding everyone in this isolation until a vaccine becomes available isn’t likely to be palatable. Releasing restrictions slowly so as to keep the level of the disease at an acceptable level would likely mean that most of the population would get the disease before the vaccine became available. Even if the most at risk population remained isolated, the estimated death rate over the majority of the population implies a nontrivial number of deaths. How do we decide how many and who to risk in order to get the economy functioning?

Consider then a system of incentives to individuals to help communicate the social externalities and guide their decisions. If there is a high prevalence of active disease in the general population, then hospitals will see excessive demand and it will be unsafe for high risk individuals to expose themselves to even minimal social interactions. A low prevalence of active disease can be more easily tolerated by hospitals, with a lower resulting death rate, and higher risk individuals may be more able to interact and provide for themselves. To promote a lower level of disease, individuals should be incentivized to delay getting sick, practicing social distancing and reducing contacts in a trade-off with ordinary necessary activity and respecting their personal risk category and risk tolerance. This lower level of disease is the “flattening of the curve”, but it also imagines the most at risk segment of the population might choose to isolate for a longer term, hoping to hold out for a vaccine.

If later disease or no disease is preferable, how do we incentivize it? Can we at the same time incentivize more usual infection control measures? Eventually everyone will either need to take an antibody test, to determine that they have had the disease and developed immunity and so are safe to resume all normal activities, or else need the vaccination. People may also be tested for active disease. We can’t penalize people for showing up with active disease, as this would mean they would skip the test and likely continue infecting other people. We should reward those who present for a test and submit to isolation when they have active disease. We can reward also those who submit to the antibody test and test positive (for the first time) who can then resume normal activities. On the other hand, we want people to delay when they get sick through prudent measures. Thus it would be a good idea to increase over time the reward for first showing up with the disease. To avoid incentivizing delay in testing, the reward for a positive test should increase as a function of the last antibody test that was negative, i.e., the reward is more if you can prove you had avoided the disease as of your last antibody test. The size of the rewards should be significant enough to cause a change of behavior but commensurate with the social cost savings induced. If we are planning on giving Americans multiple $1000 checks to get the economy going anyway, then such monies could be spent on incentives alternatively. This imagines antibody testing will be available, relatively easy and inexpensive in maybe three months, and antibody tests might be repeated maybe every three months. And of course this assumes the trajectory of the epidemic can be controlled well enough in the short term and predicted well enough in the long term to make such a scheme possible.

HT:  Colleague Steven Tschantz

This post originally appeared on the Managerial Econ Blog

In Antitrust Division, COVID-19, Justice Department, The Law, Economics, and Policy of the COVID-19 Pandemic, Truth on the Market , , , , ,
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