Bringing Epidemiology to Economics: When Risk Mitigation Pays Off
New York – Economists have spent the last nine months trying to determine how the COVID-19 pandemic has impacted our economy, with few definitive conclusions. That’s in part because most economic models have limitations – they rarely account for the randomness of disease spread, and often aren’t best suited to help us understand pandemic shocks. New research from Columbia Business School’s Chong Khoon Lin Professor of Real Estate Neng Wang pioneers a new method: using a model based in epidemiology that better captures the nuances of a pandemic. The researchers’ “stochastic” model accounts for the imminence of a vaccine and the randomness of disease spread, allowing them to put definitive data to firms’ economic recovery. The researchers find that when firms take precautions to mitigate COVID-19 risks early – such as testing employees, implementing social distancing protocols, and implementing health checks – companies may face initial losses, but in the long run, perform better than those that didn’t mitigate.
The forthcoming study, coauthored with Professor Harrison Hong in Columbia University Economics Department and Professor Jinqiang Yang at Shanghai University of Finance and Economics, answers the question of how stochastic disease transmission influences corporate valuation. Using COVID-19 case data from 16 countries at highest risk during the period of January – February 2020, they calibrated the COVID-19 stochastic transmission process. The researchers find that mitigating early actually spells success in the long run. Firms that implemented new and stricter health protocols for employees and customers at the start of the pandemic would have been 15-20% worse off had they done nothing. Overall, the future value and stock price of companies that take on mitigation, as measured by the Price to Earnings ratio, is higher than those who did not.
Corporate leaders and investors should look to the researchers’ stochastic model, which brings an epidemiological playbook to risk management and firm valuation methods, to develop more pragmatic emergency plans and make smarter investment decisions during times of crisis. The model allows the private sector to respond to health crises in ways that reflect its own interest and to behave more cautiously, protecting customers and employees by endeavoring to slow disease spread, without sacrificing performance.
The study Implications of Stochastic Transmission Rates for Managing Pandemic Risks is available online here.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About the researcher
Neng Wang is Chong Khoon Lin Professor of Real Estate and Finance at Columbia Business School. He is also a Research Associate at...Read more.