Larger Firms Have an Adaptation Advantage in Coping with Ongoing COVID-19 Infection Risk

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.

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.