The Harvard Crimson has published an interesting piece that debates the merits of another Zoom semester in fall 2020.  The author endorses delaying this semester until Spring 2021. 

Suppose that Harvard follows this plan.  Current rising Seniors (who should have graduated in May 2021) will demand dorm rooms on campus in Fall 2021 as new Freshman show up.  Given the finite supply of dorm rooms, this "excess demand" means that real estate prices in a vicinity of campuses will rise to clear the market. Owners of these properties will gain a windfall as undergraduates look for housing nearby.    Graduate students will experience a reduction in their living standards because their stipends are unlikely to rise. 

The world needs a COVID-19 Vaccine.   Is there now a patent race to deliver a high quality vaccine?  Will the "winner takes all" winner gain a multi-trillion dollar patent?  There are over 7 billion people on the planet. If the average value of life around the world is $2 million dollars and if the vaccine reduces the probability of death by 1 percentage point, then each risk neutral person would be willing to pay $20,000 for this vaccine.  The global market would be 7 billion * $20,000 = $140 trillion dollars.  That's a big market!

Now by backwards induction, each drug company knows that if it wins the patent race that public pressure would lead it to sell the vaccine at marginal cost.  In simple English, the winning firm will collect closer to $0 rather than $20,000 from each sale of the vaccine.  So, doesn't the core model of backwards induction predict that drug companies should tell their scientists to work through an open source collaborative agreement across research groups and then let all of the scientists who collectively solve this social challenge share the glory of greatly improving our collective quality of life?

A counter-factual;  if private research labs insist on not working together --- how much longer will the world wait for the vaccine? If the labs work together how much sooner will the world have the vaccine or will a free rider problem exist and slow down the race for the cure?

Are social incentives (Nobel Prizes, hugs from President Obama) sufficient to drive innovation at this key time or must we dangle a Trillion dollars for the winner? 

As each nation engages in a large Keynesian government expenditure expansion to reduce the short run economic impacts of COVID-19, this will create a huge budget deficit for every nation.   If every nation faces a budget deficit, then cross-country capital flows (i.e China buying U.S bonds) is unlikely to be a key mechanism for a given country to achieve a dynamic balanced budget.  This logic suggests that future taxes will rise.  If higher taxes reduce economic growth and given that we need future economic growth to help our economy to recover, COVID-19 could help to bring about tax reform focused on economic efficiency.

In this blog post, I will argue that larger firms have an edge in adapting to workplace COVID-19 risk.  For impatient readers, take a look at this article about Amazon's recent efforts to screen workers.   Larger firms feature the economies of scale to pay the fixed costs for cutting edge technology for screening workers.  Based on the fact that they have a lower average cost of screening workers, they will screen more workers, suffer fewer contagions and stay productive even if new surges in the virus occur.  Given that larger firms produce the bulk of the nation's GNP, this logic suggests that more and more of our economy's output will be shielded from the virus.

Larger firms not only feature scale economies but they also have better managers.  Better managers (think of Jeff Bezos) are less likely to have behavioral traits and will be more proactive in anticipating emerging challenges and being imaginative in implementing new strategies to mitigate the contagion risk.

For example, a large firm can arrange for private buses to bring workers to work.  A large firm can have its own cafeteria to limit exposure to "outsiders" as people need lunch and coffee. Don't forget Coase's work on the boundaries of the firm. Major firms may bring some of these activities back inside the organization to minimize contagion risk with those outside of the "City Walls".

Note a key point here.  Since Amazon is the residual profit claimant on all activity within Amazon, the leadership has strong incentives to take actions to mitigate the externality within its facilities.  The firm will ask workers where they live and provide them with precautions at home to minimize disease risk at work.

In an economy where large firms take extra effort to protect their workers,  workers will respond by taking actions to continue to work at these firms.  High quality firms that protect their workers will not have to pay virus "combat pay" and will not face retention issues.

In contrast, workers at smaller firms will face more risk than workers at big firms because bosses of smaller firms will take fewer precautions to protect their workers.

Large firms also care about their reputation. If Amazon has a major contagion at their Seattle office, this brings negative publicity to the firm and attract regulatory attention.  Major firms such as Amazon anticipate this point and take actions to minimize these risks. Smaller firms are less likely to do so.

If small firms suffer a contagion outbreak, they will not be able to produce and larger firms in competition with them in output markets will seize their market share. In this sense, competition in the post-COVID-19 economy will lead to an increase in market power of the more adapting firms and an even larger percentage of the economy will be insulated from the infection risk directly affecting firm profitability.

It is important to note that throughout this piece, I have not mentioned the demand for the products sold by the large firms.  Infected people and people who are not working because of unemployment purchase fewer goods.

UPDATE:  Lones Smith noted the challenge of identifying "silent spreaders" (those showing no symptoms).   Of course, this group poses a challenge but major companies are aware of this threat. This is a "known unknown".

Aware of this risk, a company such as Amazon might ask that each employee share her cell phone geocode so that tracking software can determine whether each employee has been near a recently diagnosed person.  This is just one example of how a private firm would engage in tracing.  Amazon would know each of its workers' home address and can update its data on a daily basis about "hot spots".   Over time, I predict that new medical tests will help to pinpoint who has the virus before they show symptoms.  This would reduce the count of "silent spreaders".    Amazon and other large companies would have incentives to purchase these tests for their employees to stop contagion within the firm's boundaries.   Such aggregate demand for such tests creates a profit motive for the medical companies to create this.

The key point is that a large company internalizes the spillover effects within its boundaries while a smaller firm does not.

Some time this summer, I will revise my  Price Theory Problems e-book.   Here is a new problem I will add.

My goal in posting this is to highlight how different firms are affected by the same economic shock and to show how the use of past econometric models that no longer hold create profit opportunities. I do not actively own any stock in any insurance companies and I do not consult for them.


Every driver is required to buy car insurance.   The historical probability of experiencing an accident can be expressed by the function:  prob(accident) = f(Miles_i)  where Miles_i is the count of miles person i drives per year.

ASSUME: that the price of the premium is set as a function of this historical accident function and the insurance firm is risk neutral.

The profits of the insurance firm will rise in the short run due to COVID-19.  True, False, Uncertain explain.


My tentative answer is : True

In the typical insurance model, the aggregate economic activity where the person is driving is taken as given.  So, in the prob(accident) = f(Miles_i)  there is a KEY omitted variable.  The true accident production function can be written as;  prob(accident) =f(Miles_i, Aggregate Miles)  where Aggregate Miles are all of the other vehicle miles being driven by all of the other vehicles in the area where you drive.

Since COVID-19 is a macro shock that effectively shrinks Aggregate Miles to zero, your probability of having an accident per mile of driving falls sharply and this means that holding your premium price constant, that short run insurance profits rise.

Now, where is perfect competition here?   Are the insurance companies updating their models and offering discounts now that driving per mile is safer?

Note that there is no "price gouging" here. The price of insurance does not rise. My point is that this price does not fall as the risk declines.

After writing out this problem, I see that the news is reporting that car insurance sellers profits are up.

Many urban scholars have noted that richer people tend to suburbanize.  Bob Margo's 1992 paper makes this point in a straightforward way.    The usual explanations focus on the demand for newer, larger homes and fears of center city taxes and center city quality of life challenges (crime and pollution). 

In recent years as crime has fallen in many center cities and with the rise in the sharing App economy, consumer center city living has boomed.  Will a loss of trust in the post COVID-19 era, increase the demand for low density living again?

When one gets on a public transit bus, or sends a kid to a public school, or gets in an Uber; you are implicitly trusting a number of strangers.  In these examples, these strangers include;  the other people on the bus, the network of connections to the other kids at the public school and the people who have previously taken a ride in your Uber.   During ordinary times, these webs of people offer economies of scale such that you face a lower price for using the service as you share it with them.

While such economies of scale are usually a good thing, in the contagion world of COVID-19 these social interactions expose you and your family to more disease risk (assuming there isn't a perfect vaccine).

Given that our willingness to pay to avoid mortality risk is sharply increasing with respect to income, richer people will take many more precautions to self protect and this includes a likely "suburbanization". 

If public health officials have trouble screening people (so we know that we do not know who is contagious) and we do not have a cheap and available and effective vaccine,  how much face to face interaction between people of different income groups will occur?  Will richer people engage in quiet strategies to minimize their interactions with other groups who on average face higher contagion risk because of their more limited resources?  Such statistical discrimination is a rational strategy if the sole goal of the wealthy is to survive and protect their families. 

For research urban economists a question;  has anyone written a paper on what Tiebout migration equilibria look like where the local amenity level (proxied for by disease risk) is a decreasing function of average income of the local residents?

A growing group of urban scholars are now considering the long run effects of COVID-19 on optimal urban density patterns.  Will the population spread out into more suburban living to reduce future contagion risk?  If high density (apartment and public transit intensive) living becomes less attractive, will greenhouse gas emissions rise as more of the population suburbanizes?  Will there be greater opposition to carbon pricing because suburbanites consume more fossil fuels and thus will be more likely to oppose such carbon pricing?

In a series of past papers, I have explored these themes;

1.  Ed Glaeser and I wrote a well known JUE paper on the Greenness of Cities and the role of density in reducing GHG emissions production.  Matt Holian and I published a 2015 sequel to this paper.

2.  In the past, people who lived at lower density opposed greenhouse gas pricing. I explored this theme in this 2013 paper and this 2015 paper.

3.  In April 2020, the question is whether we can build a low carbon suburban lifestyle.  Nils Kok and I have studied green real estate in California.   

In a 2017 paper, Magali Delmas and Stephen Locke and I studied a related issue.   We are interested in the complementarity between suburban households installing solar panels and buying electric vehicles.  Such suburban households have a zero carbon footprint.

If the population spreads out in response to lingering contagion fears, then the growing suburban economy can lower its greenhouse gas emissions from the transport and power sector from transitioning to the joint purchasing of renewable power and electric vehicles.  In fact, the rising demand for such a bundle of products increases the aggregate demand for such products and raises the likelihood that more firms will seek to supply such products. That was the theme of my 2018 paper with Zhao.