Might a ‘Coasean’ social contract mitigate overall societal harm from COVID-19?

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Brian Williamson1, Prof Nick Wilson2 (1Economic consultant, UK; 2University of Otago Wellington)

In this blog, we outline how a win-win social contract could be forged to address the major dimensions of response to the COVID-19 pandemic when using a mitigation strategy: the particular need to protect older people from high death rates and the desirability of maximising freedom from lock-downs and economic wellbeing for nearly everyone else. The social contract could take a range of forms, but one approach could be for a government to offer a period of extra payments to older age-groups to commit to home quarantine, with the option of opt out either with no payment or an insurance surcharge reflecting risk until either a vaccine arrived or until protective immunity arose in the population.

In response to the COVID-19 pandemic, most countries have adopted a ‘flattening the curve’ mitigation strategy. Other jurisdictions including China, Singapore, Taiwan, Hong Kong and New Zealand have adopted an elimination strategy. However, mitigation via physical distancing mandates and lock-downs applied across the board may not prove socially or economically sustainable, whilst elimination may fail or involve costly periodic re-imposition of restrictions. It is therefore critical that other strategies are planned for – including the novel mitigation strategy which is the context for this blog.

So here we propose a social bargain that recognises the reciprocal nature of the problem of mitigating the risk of harm to health, welfare and the economy from the COVID-19 pandemic. Those most at risk of hospitalisation and death should be protected, whilst others should be allowed to return to ‘normal’ life (if they prefer to). Those at relatively high risk would be offered payment to commit to home quarantine.

The bargain is ‘Coasean’ in recognising that social costs (externality) can be reciprocal – an idea developed by Ronald Coase, a Nobel Prize winning economist. Coase analysed the case of sparks from trains setting fire to crops where the train company could mitigate sparks whilst the farmer could avoid cultivation of crops close to railways; and an efficient bargain between the two could in principle be struck [1].

Reflecting different individual preferences there could be optionality for those at low risk to isolate without payment (they are not contributing to the societal good of a build-up of population immunity); whilst those at higher risk could opt out of isolation but would forego payment and potentially be required to pay a risk-adjusted health surcharge.

The aim is to improve the effectiveness of intervention to reduce health related harms caused by COVID-19, whilst also reducing the various costs associated with isolation (social, economic and foregone population immunity costs), and to do so recognising that individuals will have different preferences in relation to the individual costs and benefits of isolation. The following explores why a Coasean social contract may be superior to across the board policies or an approach targeted by cohort without compensating payments and optionality for individuals.

The unusually large intergenerational trade-offs

The COVID-19 pandemic is very unusual in its disproportionate risk for older people (see Figure), in addition to those at risk due chronic health conditions. Indeed, the risk of death if infected in the 80+ age group is around 250 times that of a 20-29 year-old; or more broadly the risk of death if infected in the under 60 age-group is 0.145% vs 3.28% in the 60+ age-group, a 23-fold difference [2]. Furthermore, a modelling study that considered New Zealand demographic data, estimated that 89% of the deaths from pandemic spread would be in the 60+ age group [3].

Figure: Infection fatality ratios for COVID-19 by age-group (data from Verity et al 2020 [2])

Moreover ‘lock-down’ type responses involve a disproportionately heavy impact on younger generations in terms of welfare, education, employment and future income (due to disruption of education and labour market entry). This is problematic, particularly following the adverse distributional impact of the financial crisis and the potential for COVID-19 to trigger a sharp contraction in GDP and employment (a ‘back of the envelope’ calculation for the US estimates unemployment rates between 10.5% and 40.5% for the second quarter of 2020 compared to 3.5% in February 2020 [4]).

Alternative approaches for mitigating overall harm

One size fits all

One way of conceptualising the trade-offs we face is cost-benefit analysis of alternative population wide social distancing measures [5]. One study concluded that the benefits of social distancing are substantial (as are the costs) but that 90% of the monetised benefit in terms of reduced risk accrues to those aged over 50 [6]. It would be better still to capture most of the benefits at a reduced social and economic cost by either targeting interventions in relation to particular groups or incentivising appropriate groups to self-select the most beneficial or least costly distancing measures aligned with the broader public interest.

Targeted intervention

Another approach is to seek to minimise deaths due to COVID-19. Given that compliance with a general lock-down may not be sustainable for more than 2 months [7] (and is socially and economically costly) and that the risk of death is a sharply increasing function of age, ensuring older people and others at risk stay in home quarantine may be more effective at minimising overall deaths (as per a previous PHE blog [8]).

Controls coupled with options and incentives (Coasean social contracting)

This option aims to refine a more targeted approach to protection recognising that individuals at high risk who home quarantine for a long-period to protect themselves (and the health system) should be supported. In contrast, low risk individuals could be given the option of early freedom from lock-down to sustain the economy, continue their education and career development and build population immunity. Furthermore, since individuals have different preferences and face different risks they should be allowed to opt in or out of isolation with payments to or from such individuals reflecting the social costs and benefits of individual choices. Those who accept support for isolation might pledge to remain isolated, and various enforcement mechanisms could be implemented.

Payments by those who opt out and are at increased risk of infection (e.g., by being elderly or having a chronic condition), could ideally reflect the expected COVID-19 related health cost for their cohort. It is possible that, unlike insurance that involves moral hazard i.e. attracting those at greater risk, that those who opt out of isolation may be a lower risk (given that opting out increases their risk of illness from COVID-19 and those who opt out may be more likely to value freedom if they are healthy and fit). Research on individual preferences could be rapidly conducted to inform the choice of thresholds and incentives.

This options approach may also have the benefit of permitting an additional feedback loop as the load on the health system evolves, namely by changing the eligibility cohort and/or by changing the payment in return for isolation or potentially holding an online auction to achieve a given level of additional opt in.

This approach may also have lower costs to the economy than turning off or on distancing measures for everyone as epidemic spread subsides or picks up again, since the ongoing uncertainty associated with such epidemic dynamics may make operating some businesses non-viable e.g., hospitality and domestic tourism.

Whilst financial incentives could undermine incentives for voluntary sacrifice and compliance for behavioural reasons, they are also more tuneable. It can be difficult, for example, to communicate clearly to the public the changes in the detailed rules in relation to home quarantine and physical distancing (e.g., around walking in parks), or potentially to maintain high compliance whilst extending the period of compliance [9].

The goal of this possible ‘third way’ is not to minimise deaths per se (though it would likely be more effective in this regard than population lock down over the longer-term), but to go beyond a health optimisation approach to a broader wellbeing maximising societal one. That is, to also reduce restrictions on freedom for those least at risk, sustain the economy with corresponding health and societal benefits and to potentially manage a transition to population immunity within the constraints of the intensive care capacity of the health system. It also has the benefit of representing a social contract which recognises the contribution everyone is making whilst improving intergenerational equity compared to crude across-the-board restrictions.

The novel social contract set out here could be explored further by governments who have pursued mitigation via physical distancing, but find that population fatigue is limiting the effectiveness or that the economic and social cost for younger cohorts in particular is simply too high. It could also be considered by jurisdictions like New Zealand that are pursuing elimination but may have to switch strategy if elimination fails or is unsustainable given the need for tight border controls whilst COVID-19 remains endemic globally.

References

  1. Coase R. The problem of social cost. The Journal of Law and Economics. 1960;3:1-44. https://www.law.uchicago.edu/files/file/coase-problem.pdf
  2. Verity R, Okell L, Dorigatti I, Winskill P, Whittaker C, Imai N, et al. Estimates of the severity of coronavirus disease 2019: a model-based analysis. Lancet Infect DisPublished Online March 30, 2020. https://doi.org/10.1016/ S1473-3099(20)30243-7.
  3. Wilson N, Telfar Barnard L, Kvalsvig A, Baker M. Potential health impacts from the COVID-19 pandemic for New Zealand if eradication fails: Report to the NZ Ministry of Health. Wellington: University of Otago Wellington, 2020. https://www.health.govt.nz/system/files/documents/publications/report_for_moh_-_covid-19_pandemic_nz_final.pdf.
  4. Faria-e-Castro M. Back-of-the-envelope estimates of next quarter’s unemployment rate. On the Economy Blog 2020;(24 March). https://www.stlouisfed.org/on-the-economy/2020/march/back-envelope-estimates-next-quarters-unemployment-rate
  5. Cornwall W. Can you put a price on COVID-19 options? Experts weigh lives versus economics. Science 2020;(31 March). https://www.sciencemag.org/news/2020/03/modelers-weigh-value-lives-and-lockdown-costs-put-price-covid-19#.
  6. Greenstone M, Nigam V. Does social distancing matter? March 2020, Working Paper 2020-26. https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_202026.pdf
  7. Financial Times. Lockdown fatigue hits as Europe enforces coronavirus restrictions. 2020;(31 March). https://www.ft.com/content/eb81dc96-c2bd-4c1c-ac8a-bf88653b0b8d?sharetype=blocked
  8. Blakely T, Baker M, Wilson N. The maths and ethics of minimising COVID-19 deaths in NZ. Public Health Expert Blog. 2020;(23 March). https://blogs.otago.ac.nz/pubhealthexpert/2020/03/23/the-maths-and-ethics-of-minimising-covid-19-deaths-in-nz/
  9. Briscese G, Lacetera N, Macis M, Tonin M. Compliance with COVID-19 social-distancing measures in Italy: The Role of Expectations and Duration. NBER Working Paper No. 26916, March 2020. https://www.nber.org/papers/w26916?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg4

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8 thoughts on “Might a ‘Coasean’ social contract mitigate overall societal harm from COVID-19?

  1. Very interesting. You’ve commented on age-related fatality. Can you please comment on the fact that those under 60 yrs who are at higher risk by nature of low SES (+ethnicity, in many cases) could have no choice but to return to work due to employer requirements? How does the model allow for this reality?

  2. I dont think policy makers have caught up with the fact that many of us over-70 year olds are in the workforce and there are the same implications for us as anyone else in the workforce, except the additional risk of contracting Covid 19. I work more than 40 hours a week so staying home has the same harms for me as a 50 year old. The world has changed and over 70 year old can be in roles that are socially or economically important. It would also seem unfair in your scenario that an over 70 year old would pay a financial penalty for staying in the workforce. There are some human rights issues you are not addressing here.

    • I think the whole idea is that individual human rights are exactly what we are trading for the health and economic wellbeing of the greater society

  3. The ideas discussed in this blog are exactly the kinds of options we should be discussing at this point in time. As soon as possible we need to have identified what the triggers are for moving out of level 4 and what reality we move into. The sooner we know what the options are, the sooner businesses and other organisations can begin to prepare. Ideally, however, we will not move into this next state until we know how well current policy is working, how long the pandemic may last and require alternative approaches to management, and what interventions will be put in place to keep the viral spread under control.

    The proposed Coasian social contract appears to assume that COVID 19 would be well under control in New Zealand and the risk of infection is very low for anyone. That’s important because widespread illness in a short time even within the younger population could potentially overwhelm the health system, so we’d have to be sure we were managing the viral spread very effectively. Drastically ramped up testing would appear to be a pre-condition, so we’re not yet able to do this. But there is good evidence that financial incentives can be used to change behaviour while preserving individual choice and freedom.

    Also, to make the proposed policy credible, we need to be clear about the incremental mortality risks of COVID19 in different groups. David Spiegelhalter at Cambridge University showed that COVID 19 doesn’t significantly increase the risk of dying for older people, it just increases the risk that a year’s worth of older people’s deaths happen within a couple of weeks (https://medium.com/wintoncentre/how-much-normal-risk-does-covid-represent-4539118e1196). In that case, we’re not really purusing a policy of “protecting older people”, we’re just trying to make sure they don’t overwhelm the system in a short time. It will be important to be clear and realistic about objectives because outcomes will be observable and government credibility is crucial to getting the economy up and running again.

    On the other hand, COVID19 might increase the risk of dying much earlier for younger people with CVD, diabetes and respiratory conditions, who might otherwise be well-managed for many years. If we extended this to them, we might really be protecting people, as well as reducing system pressure. This needs to be considered for equity reasons. We’ll leave it to the epidemiologists and public health experts to tell us whether this might be true!

    As always, targeting is difficult. It doesn’t just require reliable data, it requires lines to be drawn – around individuals, around families, around whanau, even around or within aged residential care facilities. Even though risk is lower in the younger population overall, there are sub-groups and individuals who are at higher risk, or live with someone at higher risk, or work or go to school with someone at higher risk. What about children with respiratory conditions? And their families? It’s very hard to draw the line, but these questions will be asked. Whatever the line, the rich will have more choice than the poor about self-isolating. And that will play into the debate about the social acceptability of any line.

    If we were to pursue something like this proposal, we might want to think about complementary policies to ensure things work as intended. Reasons for older people not self-isolating can be a lack of support, which financial incentives don’t necessarily resolve. Those people aren’t exercising choice, they are bound by constraints. Maybe rather than providing financial incentives (or even as well as), we should be looking at support systems.

    Similarly, asking working age people to go back to work after they’ve watched horrors unfold overseas might be unrealistic without tangible or observable protections, such as distribution of masks or widespread visible testing centres as in South Korea.

    We might also need to think about reorganising primary and community services to support older people who self-isolate for long periods or we risk a new type of vulnerability and a new type of social exclusion.

    These are good ideas to explore and may well contribute to a suite of policy options that ensure we always have a plan B as we navigate the next year or two.

  4. Thank you to all the above for the thoughtful feedback. We will potentially do an updated blog in a couple of weeks and fill in more of the possible details and strengths/limitations of this idea. At this time we may then know more about the epidemiology, the treatment options, and if NZ is still on track to achieve elimination.

  5. Important points about relative benefits of isolating all >70 years vs those say >30 years with significant underlying diseases. The topic of intergenerational inequity is however not adequately explored, especially in the context of who and how does the debt incurred by COVID expenditures get repaid? The default position is that it is simply added to the burden faced by younger generations and will thereby almost certainly increase existing inequity. Amongst those >65 years, there are also differences. There are those living in difficult economic and social circumstances, who may be surviving on the income from pension payments only – their burden should not be added to and if possible supported further. However, there is a significant % of people >65 who have substantial wealth and/or have benefited disproportionately from property price increments, especially if owning multiple properties. Changes to taxation, if targeted to those most able to pay, would make sense as a way for older people to repay the debt they owe to the young for the adversities they have accepted in the interests of protecting their elders. In NZ context, this could include capital gains tax, death duties for estates over a threshold value and means testing of pension entitlements. All of these measures would be generating income from those best able to financially contribute.

  6. An interesting idea that requires a bit more nuanced thought, particularly regarding the risk for younger Māori and Pacific peoples. Also, this feels more like a financial contract than a truly social one. And yet this idea of an intergenerational “social contract” has been on my mind over the past weeks in a very different way. I’ve been considering that if one aspect of the economic, educational and social sacrifice is indeed that being made by younger generations to protect older people (especially Pākeha elders who are more likely in this country to make it to over 70), then how about a social contract that those protected groups might support policies, and vote for political parties that are most effective at addressing the most pressing issues for young people – child poverty, the cost, quality and equity of education, climate change and other issues of long-term environmental degradation, the affordability and availability of housing, the failure of trickle down neoliberal economics to address income inequities. An analysis of voting behaviour before the 2017 election suggested that wealthy Pākeha over 65 were most likely to vote against such policies. I’ve therefore been wondering about a social contract that might shift these voting patterns (alongside a shift in other kinds of political participation that influences policy adoption and investment).
    A bit more of a national intergenerational conversation needed perhaps!

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