Lockdown Losses: Lack of Government Transparency during COVID-19 Pandemic Holds Back Businesses from Taking Risks, Making Financial Decisions

NEW YORK, April 30, 2020 /PRNewswire/ -- Since the coronavirus outbreak began, states across the U.S. have implemented stay-at-home orders, disrupting businesses and causing many to shut down. In addition, almost half of U.S. states from New York to Oregon have extended their lockdown orders beyond the original end date. These extensions of lockdown policy, while clearly beneficial to address public health concerns, can damage the economy beyond their immediate impact on business closures and layoffs. New research from Columbia Business School's Assistant Professor of Business Christian Moser and MUTB Professor of International Business Pierre Yared argues that a lack of government transparency behind lockdown extension decisions can wreak avoidable long-term havoc on the economy.  

To evaluate how lockdown policies affect business planning, the researchers develop a model of disease spread which incorporates long-term business decisions such as employee training, expansion, inventory management, and marketing. These strategic business decisions take into account expectations of the intensity and duration of a future lockdown. In this framework, a government should never lift a lockdown too early if the resulting health costs exceed economic gains.

However, Moser and Yared argue that a government should communicate a plan and stick to it. Such a plan need not involve a set-in-stone date for reopening the economy, but can be contingent on crossing certain thresholds, such as new infection numbers and hospital utilization rates. Communicating a concrete plan transparently leads to better economic outcomes when compared to having no plan, as it allows businesses to make decisions based on the best estimates of future disease progression. Although governments value discretion to react to less quantifiable information, such as the likelihood of vaccine discovery, Moser and Yared recommend that governments set clear bounds to that discretion. This can be achieved by defining limits on the extent of a future lockdown that can only be breached under extreme circumstances.

An effective lockdown policy can mitigate disease spread despite its economic costs. With COVID-19 likely to make an impact for the next several years, government commitment to clear and reliable lockdown policies is nothing short of essential for long-term economic recovery.

The study, Pandemic Lockdown: The Role of Government Commitment is available online here.

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

SOURCE Columbia Business School

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http://www.gsb.columbia.edu