As the Covid-19 pandemic continues to disrupt the global economy, regulators are struggling to find cost-effective mitigation strategies. The goal of such strategies should be simple: Reduce the spread of the virus, while causing the least amount of damage to people’s everyday lives, including economic activity. Yet, the diverse measures taken by governments only seem to have limited success in achieving that goal. Given that current estimates of the economic damage are tens of trillions of dollars, figuring out why some Covid-19 mitigation strategies still fail should be a top priority. In a new paper, we attempt to do exactly that.
Many studies examine individual mitigation strategies in a specific industry or a geographical area in isolation. They investigate, for instance, whether specific lockdowns are correlated with the number of Covid-19 cases, hospitalizations, or deaths while failing to account for some potentially important aspects. In particular, the study of isolated mitigation strategies only reflects what economists refer to as a “partial equilibrium” – how a shock (i.e. a given mitigation strategy) affects the outcome in one market while neglecting spillover effects to (or from) other markets. This sort of analysis overlooks two important economic effects: substitution and complementarity.
To illustrate, suppose that the owner of a restaurant is ordered to shut down but no other restrictions are in place. Ideally, the owner of the restaurant would switch to what we refer to as a “benign” activity (e.g., stay home and avoid meeting others). Whether this happens, however, depends on available alternatives: The restaurant owner could just switch to catering and continue to serve people at their private residences – thereby rendering the shutdown ineffective (or even counter-productive) if, say, the private residences were insufficiently ventilated. This reflects a substitution effect, as the mitigation strategy merely gives people an incentive to switch to another activity. Along similar lines, suppose instead that the restaurant owner is prohibited from selling. This alone may discourage the owner from operating any kind of business activity, causing him to stay home. That is a complementarity effect: By banning the sale of alcohol, the benefit of its complement – sharing food in a social setting – decreases.
When one considers substitutes and complements, one gets closer to estimating what occurs in a “general equilibrium”: how the eventual incentives for different behaviors, after accounting for the complete chain of events, translate into metrics (Covid-19 cases and deaths). In our recent paper we use this line of argument to explain why some Covid-19 mitigation strategies still fail. Consider, for example, Germany’s decision to enact a “lockdown light” for November 2020, which failed to achieve its goal – escalating thereafter into much harsher back-to-back lockdowns. One problem with the initial lockdown was that, while restaurants and bars were ordered to close, people could still gather in groups of up to 10 people in public. A substitution effect could then lead people to have joint picnics or set up outdoor food stands (possibly with less social-distancing than in a restaurant). Later decisions in Germany to ban the consumption of alcohol in public may have an effect similar to that of the example described above, discouraging social gatherings as a complement to drinking alcoholic beverages. Our reasoning, in turn, can help explain this chain of events.
However, the incentives of business owners may depend on heterogeneous, industry-specific factors. For instance, consider the role of business practices in restaurants (though less so in bars): Waiters may already take voluntary precautions to avoid infecting customers (e.g., by washing hands each time before serving food). By shutting down restaurants, the (then unemployed) waiters might reduce their frequency of hand-washing, thereby infecting others in a broader range of other social interactions.
Moreover, the efficacy of the measures may depend on the combination of mitigation strategies: Some legal interventions are “strategic complements” (in combination reducing Covid-19 infections by prohibiting multiple harmful behaviors that are otherwise close substitutes) whereas others are “strategic substitutes” (leading to both unnecessary spending and only minor reductions in Covid-19 infections). The degree to which substitution and complementarity effects influence behavior depends on various factors, including the degree to which people differ in their preferences for protecting others from contracting Covid-19 (rather than themselves only) and whether they behave as predicted by standard models of decision-making.
Yet, one thing is clear: Crafting mitigation strategies without considering spillover effects inevitably keeps policymakers from effectively countering the spread of Covid-19
This post comes to us from Jan-Philip Elm, a visiting research fellow at the Hebrew University of Jerusalem’s Faculty of Law and a doctoral student at the Institute of Law & Economics, University of Hamburg; and from Roee Sarel, a post-doctoral research associate at the Institute of Law & Economics, University of Hamburg. This post is based on their recent paper, “Partially Right Means Generally Wrong: Why Some COVID-19 Mitigation Strategies Keep on Failing,” available here.