The Perils of Regulating COVID-19
Summary
The Perils of Regulating COVID-19: Insights from Kirznerian Entrepreneurship and Ostromian Polycentricity is an original paper by Stefanie Haeffele, Jordan K. Lofthouse and Agustin Forzani, published in Economics of Governance (2023) 24:331–355 and published online 1 November 2022. Using Israel Kirzner's 1985 work on the perils of regulation, the authors argue that local, state and federal COVID-19 policies, such as stay-at-home orders and economic stimulus programs including the CARES Act, stifled entrepreneurial discovery and created opportunities for superfluous discovery. The paper argues that polycentric governance systems can let policymakers experiment with different approaches and limit spillover effects across jurisdictions. It is organized in five sections and closes with references and author affiliations at the Mercatus Center at George Mason University.
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Economics of Governance (2023) 24:331–355
https://doi.org/10.1007/s10101-022-00284-z
ORIGINAL PAPER
The Perils of Regulating COVID–19: Insights from Kirznerian
Entrepreneurship and Ostromian Polycentricity
Stefanie Haeffele1 · Jordan K. Lofthouse1 · Agustin Forzani2
Received: 25 January 2022 / Accepted: 18 September 2022 / Published online: 1 November 2022
© This is a U.S. Government work and not under copyright protection in the US; foreign copyright protection
may apply 2022
Abstract
During the COVID-19 pandemic, governments at every level in the United States
made various policies to reduce the spread of the disease and to mitigate pandemic-
related economic impacts. Such policies included stay-at-home orders that shuttered
“non-essential” businesses and economic stimulus programs that provided financial
assistance. Using Israel Kirzner’s insights from “The Perils of Regulation,” we
argue that local, state, and federal COVID-19 policies have had and will continue
to have long-run spillover effects and other negative unintended consequences.
Pandemic policies have stifled entrepreneurial discovery and created opportunities
for superfluous discovery, thus directing entrepreneurial efforts in directions that
would not have existed otherwise. The normative implications of this analysis are
that policymakers should better account for the wide variety of seen and unseen
costs of policies that are likely to have many negative unintended consequences,
regardless of the intentions behind such policies. One of the most effective ways
to limit the perils of regulation is polycentric governance systems. With multiple,
overlapping decision-making centers, polycentric systems allow for policymakers
to experiment with different policy approaches and learn from other jurisdictions.
Polycentric systems also limit the spillover effects of negative unintended conse-
quences onto other jurisdictions.
Keywords Regulation · Public policy · Entrepreneurship · Polycentricity ·
COVID-19 · Crisis
(submission for the special issue “Polycentrism vs Gargantua in Municipal Governance: crises and
community Resilience” of Economics of Governance)
Extended author information available on the last page of the article
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332 S. Haeffele et al.
1 Introduction1
Beginning in early 2020, the COVID-19 pandemic has devastated the United States,
leading to hundreds of thousands of deaths, economic decline, unemployment and
labor shortages, and countless other economic and social effects. Policymakers at
every level of government responded. For example, nearly every state enacted some
form of executive or emergency order to reduce the spread of the disease beginning
in March and April 2020. Many of these policies lasted, in some form, well into 2021.
These orders provided broad guidelines to prevent the spread of the virus, such as
maintaining physical distancing, practicing good hygiene (like handwashing, wear-
ing facemasks, etc.), and limiting travel. Most of these policies also included stay-at-
home orders that temporarily prohibited people from leaving their homes, except for
“essential” activities.2 The federal government did not implement a national stay-at-
home order or enforce essentialness designations, but instead, provided guidelines to
determine the “essentialness” of businesses, leaving each state to choose the specific
contents of their own stay-at-home policies (Cybersecurity and Infrastructure Secu-
rity Agency 2020). “Non-essential” businesses were ordered to close, and violators
were sometimes fined or imprisoned (see Storr et al. 2021).3
Additionally, the federal government carried out several economic programs to
mitigate the pandemic-induced recession (US Government Information and Services
2020). Congress passed two pieces of pandemic-related legislation during 2020: the
Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Coronavirus
Response Relief Supplemental Appropriations Act. These two relief packages pro-
vided trillions of dollars to individuals and businesses impacted by both the pandemic
itself and the economic repercussions caused by state restrictions meant to limit the
spread of the disease.
In this paper, we use Israel Kirzner’s insights from “The Perils of Regulation”
(1985) to argue that local, state, and federal COVID-19 policies have had and will
continue to have spillover effects on other markets, public policies, and individuals.
Kirzner’s arguments about the perils of regulation emerge from a long intellectual
tradition related to the dynamics of interventionism (Mises [1949] 1998; Kirzner
1985; Ikeda 2002, 2005). Markets are highly complex spontaneous orders that can-
not be easily controlled. When policies directly and indirectly impact markets, the
spontaneous order that makes markets function is altered. An entrepreneur, by defini-
tion, is alert to potential opportunities that might arise and is the driver of the market
process (Kirzner [1973] 2013, 1985). Public policies alter previously existing entre-
preneurial opportunities and simultaneously create new ones, therefore transforming
entrepreneurial activity in a direction it would not have gone otherwise. Public poli-
1
We would like to thank participants of the Polycentrism vs. Gargantua in Municipal Governance: crises
and community resilience workshop for their valuable feedback and suggestions. We also want to thank
the two anonymous reviewers who gave thoughtful and helpful comments.
2
Only South Dakota did not issue an executive order; the governor just recommended businesses to
comply with CDC guidelines.
3
It is important to note that some states took policy actions that deregulatory as well, such as removing
cumbersome “certificate of need” provisions that require potential or existing healthcare providers to
obtain permission from state officials to open or expand their operations (see Erickson 2021).
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The Perils of Regulating COVID–19: Insights from Kirznerian… 333
cies often disrupt existing and impose new incentives and constraints that entrepre-
neurs face. In other words, these policies stifle entrepreneurs from discovering the
socially beneficial opportunities that they would have discovered if the policies were
never enacted. Additionally, the new incentives and constraints lead entrepreneurs to
be alert to and take advantage of different profit opportunities, which are often super-
fluous and possibly socially harmful because they change positive-sum scenarios of
mutually beneficial exchange to zero- or even negative-sum scenarios of rent seeking
and political competition.
We argue that many COVID-19 policies, such as stay-at-home orders and large
economic stimulus programs, have exhibited signs of Kirzner’s perils of regula-
tion, including the stifling of entrepreneurial discovery and creating opportunities
for superfluous discovery. This paper fills a gap in the emerging literature on the
political economy of COVID-19 by showing how pandemic policies have altered the
entrepreneurial market process. Additionally, this paper builds on the previous work
of Storr et al. (2021) on the epistemic limitations of COVID-19 policies like stay-at-
home orders.
It is difficult to determine to what extent COVID-19 policies prevented a worse
scenario than if there had been no interventions at all. State restrictions and federal
spending programs have undoubtedly benefited many people, but when considering
the full range of tradeoffs and unintended consequences, such policies may have
created more harm than good in some instances. For example, the increase in the
unemployment benefits changed the incentive structure of workers who were laid off.
Some people earned more money from the unemployment benefits than they previ-
ously earned at their job, causing a disincentive to return to work at the margin when
it was deemed safe to do so (Ganong et al. 2020; Holzer et al. 2021).4 Similarly, the
Paycheck Protection Program (PPP) loans system, provided by the Small Business
Administration (SBA), was subject to billions of dollars in fraudulent claims (Bailey
et al. 2021). Thus, pandemic policies can and have disrupted the market’s discovery
process and led entrepreneurs to engage in activities that are often socially wasteful.
The normative implications of this analysis are that policymakers should consider
the wide variety of seen and unseen costs of policies that are likely to have many neg-
ative unintended consequences. Highlighting the perils of regulation does not mean
that policymakers cannot or should not create public policies during a pandemic;
however, Kirzner’s insights illuminate the costs of public policies so that policy-
makers can more accurately account for the opportunity costs of their decisions. To
prevent socially harmful public policies in the future, it is imperative to examine the
perils of regulating COVID–19.
Further, particular governance systems, such as polycentricity, may be better
suited to adapt to the changing circumstances of an ongoing, global pandemic. Poly-
centric governance structures may be especially helpful when considering the stifled
and superfluous discovery processes that were sparked by the various COVID-19
policies. Since polycentric systems have multiple decision-making centers, policy-
4
Some scholars are skeptical that most individuals would reject offers to return to work at their previous
wage under the CARES Act expanded unemployment insurance payments (see Petrosky-Nadeau and
Valletta 2021).
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334 S. Haeffele et al.
makers can experiment with different policies in various jurisdictions. Through this
“laboratory of democracy,” policymakers can mutually learn from the successes and
failures of their counterparts in other jurisdictions as well as tailor policies based on
their unique circumstances. Additionally, an institutional failure in one jurisdiction is
limited in how much it can spillover onto other jurisdictions and lessons from more
successful jurisdictions may be utilized to correct course (Ostrom 1976). Due to the
diversity of stay-at-home orders and essentialness designations among the various
states, not all places in the United States experienced the same types of stifled and
superfluous entrepreneurial discoveries. However, federal policies tended to create
similar patterns of stifled and superfluous entrepreneurial discovery throughout the
country.
This paper proceeds as follows. In Section 2, we review the theoretical founda-
tions of the market process, the dynamics of interventionism, and Kirzner’s concep-
tion of the perils of regulation to understand and analyze pandemic policy responses.
In Section 3, we analyze some important public policies during the COVID-19 pan-
demic, including stay-at-home orders and the major COVID-19 relief bills, which
have exhibited signs of Kirzner’s perils of regulation. Section 4 examines the way in
which polycentric governance structures can mitigate the perils of regulation. Sec-
tion 5 concludes with the implications of this research.
2 The Perils of Regulation and the Kirznerian Entrepreneur
To understand Kirzner’s conception of the perils of regulation, it is first important to
understand the entrepreneurial market process, which is rooted in private property,
market prices, and the feedback mechanism of profit and loss. If private property
exists, a market for private property can emerge where people engage in voluntary
exchanges. Subsequently, monetary prices emerge from these voluntary exchanges.
Monetary prices communicate the relative scarcity of goods, enabling rational eco-
nomic calculation, which is the ability to weigh the economic feasibility of a given
decision from the array of possibilities (Mises [1949] 1998; Hayek 1945). Economic
calculation allows individuals to make the most economically viable decision from
among the multitude of technologically possible alternatives. Using economic calcu-
lation as a guide, entrepreneurs make decisions in a world of uncertainty. They test
out their ideas in a market, and profit or loss give entrepreneurs important feedback
on their decisions. Receiving profits is a signal that entrepreneurs are fulfilling the
needs and wants of consumers, and incurring losses is a signal that an entrepreneurs
should alter their plans in some way. Thus, the combination of market prices and
profit-and-loss provide the knowledge and incentives for entrepreneurs to engage in
socially beneficial action.
In Kirzner’s conception, entrepreneurs are the driving force of the market process
because they are alert to profit opportunities that arise in a dynamic world (Kirzner
[1973] 2013). As such, entrepreneurs are alert to and discover new ends or more
efficient means of attaining ends. Once entrepreneurs discover a potentially profit-
able opportunity in the market, they make adjustments in systems of exchange and
production to take advantage of that opportunity.
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The Perils of Regulating COVID–19: Insights from Kirznerian… 335
Entrepreneurial choices are disciplined by market prices and the feedback mecha-
nism of profit and loss. Entrepreneurs are dependent on market prices, which com-
municate relevant knowledge necessary for both producers and consumers to know
when to economize on their use of any resource (Mises [1922] 1981, [1949] 1998).
Entrepreneurs interpret the embedded knowledge in prices and act on that knowl-
edge. In the real world, change is constant, and entrepreneurs read the signals of price
changes and react to the feedback of profit and loss to adapt their behavior (Hayek
1945).5 As Mises ([1944] 2007, 23) argues, “Population figures, tastes, and wants, the
supply of factors of production and technological methods are in a ceaseless flux. In
such a state of affairs there is need for a continuous adjustment of production to the
change in conditions. This is where the entrepreneur comes in.”
In an unhampered market, profit is an indicator that an entrepreneur’s ideas and
actions are fulfilling human wants, and losses are an indicator that the resources an
entrepreneur is using would be employed in more highly valued ways elsewhere.
The market process is a discovery procedure in the sense that it is a dynamic mecha-
nism in which entrepreneurs discover profit opportunities that arise from exchange.
Through the market process, entrepreneurs have both the incentives and the feedback
to determine which goods consumers need, how urgent those needs are, which quali-
ties and quantities of goods that consumers demand, where those goods are needed,
and when they are needed.
The theory of the dynamics of interventionism explains why one policy interven-
tion into a market is often followed by subsequent interventions. Government inter-
ventions can significantly impact what entrepreneurs are alert to as well as the price
signals and the feedback mechanisms of profit and loss they receive (Kirzner 1985).
Such policies can incentivize entrepreneurs or potential entrepreneurs to respond
directly to the intervention, possibly undermining the stated intentions behind the
policy (Mises [1929] 2011). Further, policies are necessarily simple relative to the
complex system being intervened upon. Well-intentioned, micro‐level actions will
differ from the macro‐level patterns that emerge (Wagner 2016). The complexity of
markets means that any policy interventions, no matter the underlying intentions,
will result in a chain of consequences that the interveners could not perfectly pre-
dict, given the limitations on human reason. In the context of government responses
to public health crises, the unintended chain of effects from policy can potentially
produce significant costs and undermine the intended goals (Coyne et al. 2021).
For example, the spread of COVID-19 triggered governments around the globe to
institute restrictions on businesses, travel, and social gathering and encouraged (and
sometimes forced) residents to remain at home to slow the spread of the disease and
not overburden the healthcare system. The longer these practices remained in place
(both formally and informally through changes in consumer behavior), the more nec-
essary it became to offer stimulus checks and other forms of assistance to counter the
5
We use the term “knowledge” here as a shorthand for both “knowledge” and “information.” However,
Hayek, Kirzner, and others in the Austrian tradition use those terms to mean related but distinct things.
Some forms of knowledge are tacit and inarticulable, which cannot be reduced to information (see Lavoie
1986). However, information is a component of many types of knowledge. Market prices aggregate and
communicate both knowledge and information, and market prices can also aid in the discovery of new
forms of both knowledge and information.
13
336 S. Haeffele et al.
economic downturn. Additionally, isolation can lead to more pressure on assistance
programs that provide mental health services. In this sense, each policy is partially
caused by the ones proceeding it, and each incurs costs as well as providing relief.
Government actors must then decide to implement more interventions to combat
these unintended consequences, or to retract the intervention and allow people to
engage in the exchanges that they would have if the intervention had never been in
place (Ikeda 2002, 2005). The dynamics of interventionism is a coherent explana-
tion for why some government policies do not achieve their stated ends, and why
policymakers may tweak or add on new interventions to stem those unintended con-
sequences. The dynamics of interventionism also explains why policymakers some-
times remove highly distortionary policies once they realize they are not workable.
Take two examples from the pandemic. First, Denver, Colorado attempted to close
liquor stores and recreational marijuana dispensaries in March 2020, deeming them
non-essential (see Redford and Dills 2021; Sexton et al. 2020). However, when long
lines formed outside of the stores just hours after the announcement, the decision was
reversed due to public health concerns regarding exposure risk (ibid.). In an attempt
to limit activity, policymakers actually instituted policies that could increase the
spread of COVID-19 rather than reduce it. Second, in the summer of 2020, the fed-
eral government declared that any international students enrolled in online courses
for the fall would be required to return to their home countries (see Griswold and
Salmon 2020; Storr et al. 2022). Universities across the country filed lawsuits and the
decision was quickly reversed. In the short time it was in place, students, universities,
and communities realized the uncertainty and compliance issues with enforcing the
rule as well as the economic and social impacts of forcing over one million interna-
tional students to leave the country (ibid.).
Not all types of entrepreneurship are socially productive, and some forms of
entrepreneurship are socially unproductive or even destructive. Productive entrepre-
neurship yields a net increase in wealth in a society, whereas unproductive entrepre-
neurship is simply a transfer of wealth, and destructive entrepreneurship reduces the
net amount of wealth in a society (Baumol 1990; March et al. 2016). In other words,
productive entrepreneurship is a positive-sum game, unproductive entrepreneurship
is a zero-sum game, and destructive entrepreneurship is a negative-sum game. The
formal and informal incentives and constraints that entrepreneurs face will shape
how productive, unproductive, or destructive entrepreneurship will be.
In societies that have relatively free markets, well-protected property rights, and
the rule of law, market entrepreneurship will generally lead to socially productive
outcomes as they discover the needs and wants of consumers and compete among
themselves to best provide consumers with goods and services. Legal structures and
public policies are important sources of incentives and constraints for entrepreneurs.
Despite the intentions motivating public policies, the incentives created by those
policies direct market entrepreneurs to be alert to and discover different opportunities
that would not have existed if the policy had not been created. Policies can encourage
productive entrepreneurship if the altered incentives counter market failures or lead
to socially beneficial outcomes. Political rent-seeking, however, is unproductive and
can become destructive when competition is restricted. When rules and institutions
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The Perils of Regulating COVID–19: Insights from Kirznerian… 337
change, the relative payoffs of different activities will also change, leading entrepre-
neurs to direct their attention and action in different ways.
Kirzner’s (1985) “perils of regulation” argument articulates how unintended
consequences of policies can arise due to entrepreneurs rationally responding to
the incentives and constraints that the policies create, which can then spur further
interventions. Kirzner outlines four types of discovery processes that emerge from
government interventions into the market process: regulators may try to correct
perceived inefficiencies or failures in the market that entrepreneurs have not previ-
ously identified or corrected (undiscovered), regulators attempt to simulate market
outcomes but fall short (unsimulated), regulators end up restricting entrepreneurship
(stifling), and regulators incentivize alternative, less socially useful entrepreneurial
activity (superfluous).
The stifling of the entrepreneurial discovery processes of the market is problem-
atic because discoveries that would have satisfied the needs and wants of consumers
remain undiscovered. Additionally, it is impossible to know the costs of the innova-
tions that went undiscovered because we cannot know what would have happened if
a policy was never put into place. Despite this limitation, we can imagine the types of
discoveries that would have been made if public policies had not stifled the discovery
process. For example, when public policies raise compliance costs, large firms are
better equipped to handle those costs, and smaller firms are squeezed out of the mar-
ket. New entrepreneurial discoveries may arise from smaller or newer firms. As such,
smaller firms lose out on potential profit, and consumers lose out on innovations that
could have occurred if the smaller firms were able to test out their ideas.
Kirzner acknowledges that government regulations may be beneficial in many
ways, but just because a public policy has benefits, that does not mean that there are
not also costs. To know whether a public policy is socially desirable, the marginal
social benefits should equal the marginal social cost. If regulations stifle the entre-
preneurial discovery processes, the marginal costs of that stifling might outweigh
the marginal benefits that come to a society from a particular regulation. As Kirzner
(1985, 143–144) argues,
Price and quality restraints and requirements and restriction on organizational
forms operate (in a generally understood but not precisely predictable way) to
inhibit entrepreneurial discovery. Price ceilings, for example, not only restrict
supply from known sources of natural gas (or from known prospects for search),
but also inhibit the discovery of wholly unknown sources. Drug testing regu-
lations, as another example, not only reduce the flow of new pharmaceutical
drugs where successful research might have been more or less predictable, but
also discourage the entrepreneurial discovery of wholly unknown research pro-
cedures. Against whatever benefits might be derived from government regula-
tion and intervention, one is forced to weigh, as one of regulation’s intrinsically
immeasurable costs, the stifling of the market discovery process.
Politicians often gain support by enacting policies that favor certain industries, com-
panies, or individuals at the expense of taxpayers. Policymakers have the power of
the state to compel others to obey government policies, which may be normatively
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338 S. Haeffele et al.
desirable in some cases and detrimental in others. The coercive nature of the state
allows policymakers to concentrate benefits for special interest groups, while dis-
persing the costs among everyone else. Thus, political actors can and do design poli-
cies in ways that benefit special interests instead of the public interest (Holcombe
2018). Public policies can create new, superfluous opportunities for entrepreneurial
discovery, and many entrepreneurs take advantage of those opportunities. For exam-
ple, entrepreneurs may engage in lobbying and rent seeking to persuade politicians
to provide subsidies or protections from competition. However, the policy-dependent
opportunities may not be positive-sum like those in an unhampered market. In fact,
many of these opportunities exhibit socially harmful tendencies, such as restricted
market competition, rent seeking, lobbying, bribery, and other forms of corruption.
Additionally, once a public policy is enacted, superfluous discovery arises in the
market process in response to that policy, regardless of any nefarious or benevolent
intentions behind it. Entrepreneurs will be alert to and discover new goods and ser-
vices that correspond directly to the public policies, and those goods and services
would not have been discovered if the policy had never been enacted. For example,
COVID policies might alter health and safety requirements for business owners who
might not have the time or expertise to keep up on the latest requirements. Individuals
who are familiar with those requirements might act entrepreneurially by selling their
knowledge-based services to business owners. Thus, selling services to help others
comply with regulations is a form of superfluous discovery that came about due spe-
cifically to the existence of regulations.
3 COVID-19 policies and the Perils of Regulation
COVID-19 policies have stifled entrepreneurial discovery and created opportunities
for superfluous discovery, directing entrepreneurial efforts in directions that would
not have existed without those policies. The effects of stifled and superfluous entre-
preneurial discovery often contradict the goals of the policies that were enacted to
suppress the virus and provide assistance for those impacted by the economic and
social costs of the pandemic. We examine two types of policies using this lens: stay-
at-home orders and economic stimulus programs.
3.1 Stay-at-home orders and essentialness designations
In early 2020, US policymakers at various levels of government began implementing
stay-at-home orders or equivalent policies that called for “non-essential” businesses
to close while allowing “essential” businesses to continue operations. Stay-at-home
orders directly affected the livelihoods and economic wellbeing of tens of mil-
lions of Americans, thus making them one of the most controversial policies dur-
ing the COVID-19 pandemic. Nationwide, a total of 4.4 million businesses (52%)
told employees not to work, at least temporarily, during the pandemic, and roughly
1.6 million businesses (19%) were required to close due to government mandates
(Bureau of Labor Statistics 2020).
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The Perils of Regulating COVID–19: Insights from Kirznerian… 339
Nearly all definitions of essentialness centered on the health, safety, and welfare of
the public and utilized federal guidance for prioritizing certain industries over others
(Cybersecurity and Infrastructure Security Agency 2020). Most orders had a broad
consensus on which industries were essential, including healthcare and pharmaceuti-
cal facilities, transportation-related firms, agriculture and food related firms, hard-
ware stores, funeral services, banks, internet and phone providers, energy and utility
providers, and many types of retailers. However, some notable differences existed
among the states regarding the essentialness of some businesses. For example, while
most states determined that liquor stores and medical and recreational marijuana
dispensaries were essential, Pennsylvania notably closed state-run liquor stores and
Massachusetts closed recreational dispensaries (Redford and Dills 2021; Storr et al.
2021). In some states, pawn shops could be categorized as financial services (and
therefore essential) where in others they were not (Storr et al. 2021).
Even bordering states with overlapping metropolitan areas had significant dif-
ferences in their essentialness designations, such as Delaware, Pennsylvania, and
Maryland (WFMZ 2020; Delaware 2020; Maryland 2020; Redford and Dills 2021;
Storr et al. 2021). For instance, Pennsylvania officials determined that most kinds of
construction and electrical and mechanical equipment manufacturing were not essen-
tial, but Delaware and Maryland allowed these industries to continue. Pennsylvania
and Maryland forced clothing and footwear manufacturing to stop, but Delaware
allowed those industries to continue. Pennsylvania forced its alcohol stores to close,
but Maryland and Delaware kept them open. And Delaware closed its consumer-
goods rental businesses, but Maryland and Pennsylvania allowed them to remain
open. Navigating the sometimes vague and other times incredibly detailed orders can
be challenging for business owners and consumers alike, and especially so when liv-
ing in one state and working in another bordering state.6
Policymakers who implemented stay-at-home orders and the accompanying
essentialness designations implicitly or explicitly assumed that they knew ex ante
which goods, services, and activities are essential. However, from a market process
approach, policymakers cannot know the true essentialness of any good, service,
or activity for at least three reasons: (1) they do not have access to the dispersed,
inarticulate, and subjective knowledge of consumers; (2) they lack intimate knowl-
edge about the complex network of production processes that rely on market prices
and on-the-ground knowledge to create final consumer goods; and, (3) the world is
constantly changing and goods and services that might be essential at one point in
time might no longer be essential, meaning that policymakers lack the knowledge to
adapt quickly and efficiently to these changes (Storr et al. 2021). Thus, in Kirzner’s
terms, policymakers cannot simulate the advantages of the entrepreneurial discovery
process because they lack market prices and the profit-and-loss mechanism to guide
their decisions and cannot accurately discover inefficiencies over time and as circum-
stances change.
6
Despite the benefits of polycentric systems, there are undeniable tradeoffs with having overlapping and
nested decision-making centers. Navigating multiple regulatory regimes is one potential cost of poly-
centric jurisdictional competition during a public health crisis. Despite these potential costs, polycentric
systems often produce more socially desirable results when compared to the relevant alternative of mono-
centric decision making (discussed in more detail in Sect. 4).
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340 S. Haeffele et al.
Take, for example, the need for medical equipment during the pandemic. As cases
rose in the US, it became clear that ventilators were often necessary treatment for
severe cases and that many hospitals lacked enough ventilators to meet demand. In
response, the federal government utilized the Defense Production Act to contract
with General Motors to produce 30,000 ventilators (Coyne et al. 2021; Wayland
2020). However, most hospitals did not have enough trained staff and equipment
needed to effectively take on more ventilators (ibid.). While there was potentially a
lack of supply, just increasing the number of ventilators would not solve the complex
problem of hospital capacity (which includes not only equipment but staff and the
services they provide) on its own. It is only by using the knowledge embedded in
market prices and the feedback of profit and loss that allows market entrepreneurs
to determine whether their actions are fulfilling the needs and wants of consumers.
A central authority is epistemically limited from determining ex ante the kinds of
goods or services consumers want and how urgently consumers want them (Hayek
1937, 1945; Kirzner [1973] 2013, 1985; Lavoie 1985a, b; Boettke 2002; Storr et
al. 2021). Thus, this example shows how stifling entrepreneurial action undermines
the ability to adapt to uncertain and dynamic circumstances. In this example, staff-
ing issues were not the only problem; these staffing issues made it more difficult for
entrepreneurs to use tacit knowledge that would best allow them to exploit the dis-
persed information necessary to adapt to consumers’ desires. Stifling entrepreneurial
discoveries during a crisis is especially problematic because crises are exactly when
such discoveries are most needed.
Perhaps even more important than the inability of policymakers to simulate the
process of entrepreneurial discovery is the stifling of that process. The restrictive
nature of many stay-at-home orders created an environment where the normal entre-
preneurial discovery process was stifled. During a time of crisis when entrepreneurial
discoveries are most needed, stay-at-home orders suppressed the ability of entre-
preneurs to engage in finding and exploiting opportunities to fulfil the needs and
wants of consumers. Kirzner (1985, 141) notes that, “A price ceiling, a price floor,
an impeded merger, or an imposed safety requirement might block possibly profit-
able entrepreneurial actions.” Stay-at-home orders and essentialness designations are
imposed safety requirements that can block profitable entrepreneurial actions.
Stay-at-home orders and essentialness designations stifled the discovery process
because they restricted freedom of entry into the market, which subsequently lim-
ited the ability of entrepreneurs to make the discoveries that are essential to provide
consumers with the goods and services they need. As mentioned earlier, the Bureau
of Labor Statistics reported that 19% of businesses were forced to close due to gov-
ernment mandates during the 2020 (Bureau of Labor Statistics 2020). While some
industries could shift to telework, large firms were better able to make the switch
with 86% increasing telework options compared to only 31% of small businesses
(ibid.). Additionally, restrictions on travel and indoor gatherings and subsequent
decreases in demand limited the activities of food, retail, travel, and entertainment
industries across the country. These industries are still struggling to find and keep
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The Perils of Regulating COVID–19: Insights from Kirznerian… 341
staff as demand begins to rebound.7 Indeed, a recent study found that the states with
the most severe stay-at-home orders had lasting negative impacts on employment 12
and 15 months after the onset of the pandemic (George Center for Opportunity 2021).
Despite facing obstacles, many entrepreneurs found ways to provide consumers
with the goods and services they desired (Storr et al. 2022). Many entrepreneurs
altered their business models to address government restrictions as well as changes in
consumer demands. Restaurants switched to curb-side pickup and delivery, and some
began selling staple foods and cleaning supplies that they could get from their whole-
salers when grocery stores faced shortages. Distilleries began making hand sanitizer,
clothing manufacturers constructed masks, and vacuum manufacturers made ventila-
tors. Gyms, therapists, and veterinarians turned to online platforms to engage their
customers and clients (Storr et al. 2022). Due to supply constraints and/or demand-
side hoarding, toilet paper became increasingly during the early part of the pandemic.
This situation provided the incentive for entrepreneurs to find creative solutions, and
many entrepreneurs responded by selling bamboo-based toilet paper (see King 2020;
Ceniza-Levine 2020). This adaptability allowed some businesses to survive the worst
of the pandemic, finding unique ways to respond to government stay-at-home orders
as well as changing consumer demand. Indeed, in a survey of adults in the US that
we conducted in August 2020, we found that almost 78% utilized pickup, delivery,
and mail order to purchase goods during the peak months of the pandemic.8 For the
same group, 49% increased, and 38% maintained, their online purchasing behavior.
As the pandemic continued through 2020 and into 2021, policymakers extended
stay-at-home orders or implemented new restrictions on gathering (such as limiting
indoor capacity, restricting the number of people at gatherings, requiring mask wear-
ing and distancing of six feet, etc.). Restrictions on daily activities were no longer
temporary as the months went on, and as such, demands changed. For example, tele-
workers began to seek out furniture and equipment to improve working from home.
Not only were companies like Amazon inundated with online orders, but supply was
limited by manufacturers of furniture, lighting, and other retail goods (like those
in Pennsylvania) that were forced to close and subsequently adjust their processes
when allowed to reopen. Additionally, many homebound people started new hob-
bies, such as baking and crafting, to fill their time. These new sources of home-based
entertainment increased demand for a variety of goods and resulted in shortages of
flour, lumber, and even particular types of pasta (Mull 2020; Lambert 2021). While
entrepreneurs adjusted to these demands, they had to do so within the confines of
pandemic-related restrictions.
7
It is important to note that shutdowns contributed to the labor shortage, but they may not have been
the major driver of the labor shortage. Other causes likely included (1) people who were close to retire-
ment age deciding to retire early, (2) people choosing to leave the labor force to care for someone with
vulnerabilities to COVID-19, and (3) unemployment benefit generosity providing disincentives to return
to work.
8
The survey was administered through Qualtrics in August 2020 and targeted United States residents over
18 years old. It asked a series of questions about pandemic-related community connectedness, regula-
tions and policies, and changes to work and education. We received 1,105 total responses and used 967
for our analysis (removing those that included multiple nonsensical answers). The sample was diverse
with even distribution across regions (though with less respondents from west coast), age, gender, educa-
tion, employment, and marital status. However, the population was predominantly white (75%).
13
342 S. Haeffele et al.
Not only did stay-at-home restrictions stifle entrepreneurial discovery, however,
they also sparked superfluous entrepreneurial discovery because entrepreneurs took
advantage of entirely new profit opportunities created by the restrictions. These profit
opportunities arose exclusively from the government mandates, and not from changes
in consumer desires. Many business owners could not afford to remain closed, so they
began to search for potential solutions, which sometimes involved evading the state
restrictions by switching the industry to which they were associated. For instance,
bars and breweries started to offer food so they could operate as restaurants when
they were forced to close or reduce activities otherwise (Carman 2020). Even in
Florida, which had fairly weak restrictions, strip clubs turned into restaurants to keep
their doors open (ibid.). In other places, strip clubs also provided car washes, started
meal delivery services, and devised drive-thru entertainment services (see WNCT
2020; Prewitt 2020; Licea 2020). Hair salons in California reopened on the black
market, offering haircuts in people’s houses in order to make ends meet (Carlton and
Ansari 2020). In Pennsylvania, restaurants surrendered their liquor licenses so they
could stay open (Strebig 2020). This process of adapting took time, bureaucratic
paperwork, and other resources that could have been directed at serving customers.
An example of beneficial policy change during the pandemic is that many state
governments relaxed restrictions on alcohol sales, allowing restaurants to offer to-go
cocktails and for contactless delivery (Redford and Dills 2021). Several states have
now made these deregulations permanent, and a majority of Americans support them
(Barrios 2021). Similarly, making telehealth and occupational licensing easements
permanent would give entrepreneurs the flexibility to adapt in more sustainable ways
and increase services for those in need (see Weiner 2021).
It can be difficult to determine which adaptations were beneficial or superfluous
given the sharp change in both policies and consumer behavior, which was likely also
impacted by stay-at-home orders. For instance, Glaeser et al. (2021) found that as
stay-at-home relaxed, citizens saw that as a signal that it was safer to go to restaurants
and went out more (even if risk of COVID-19 was still prevalent). Likely, some will
continue after the pandemic ends, like customers shifting to more sustainable hygiene
products or restaurants offering curbside pickup. While others may not, such as the
food services at some strip clubs and bars. That said, the influence of essentialness
orders altered the options for entrepreneurs in significant ways.
3.2 Federal economic stimulus programs
In 2020, Congress passed two large economic stimulus bills that appropriated tril-
lions of dollars. On March 27, 2020, the Coronavirus Aid, Relief, and Economic
Security (CARES) Act was signed into law and appropriated $2.2 trillion (US Con-
gress 2020a). On December 27, 2020, the Coronavirus Response Relief Supplemen-
tal Appropriations Act provided another $900 billion (US Congress 2020b).9 Money
was directed broadly, including direct cash payments to individuals, loans designed
to keep workers on small-business payrolls through the Paycheck Protection Program
9
It was passed together with a $1.4 trillion omnibus spending bill for the federal fiscal year of 2021 and
constituted the Consolidated Appropriations Act (US Congress 2020b).
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The Perils of Regulating COVID–19: Insights from Kirznerian… 343
(PPP), and resources to create strategic stockpiles of medical supplies. The primary
provisions of the first bill included $300 billion in cash payments to (almost) every
American, $260 billion in unemployment benefits, $669 billion in loans to small
businesses, and $500 billion for corporations. The second act granted $166 billion in
stimulus checks, $120 billion in unemployment benefits, and $325 billion to small
businesses. Additionally, the Federal Pandemic Unemployment Compensation pro-
gram provision in the CARES act provided an additional $600 per week for those
receiving unemployment benefits (US Congress 2020a).
The vast sums of money that were appropriated by Congress created an environ-
ment ripe for Kirzner’s (1985) conception of superfluous discovery. The members of
Congress who wrote and passed these two spending bills likely did not aim to rear-
range profit opportunities and did not fully know how such large amounts of public
spending would spark new, superfluous forms of entrepreneurial discovery. Since
policymakers cannot be perfectly informed about all relevant data about the market,
their policies inevitably set in motion a series of entrepreneurial actions that they
could not have anticipated (Kirzner 1985). The billions of dollars that were put up for
grabs from these two bills altered the patterns of discovery that entrepreneurs made.
Many of these unexpected outcomes are socially undesirable and even undesirable
from the view of the policymakers themselves.
Nominally, the federal economic programs were meant to help struggling indi-
viduals and firms who had been negatively impacted by the pandemic. However,
these government programs also caused many entrepreneurs to change their behavior
in unproductive ways because they began to focus on the zero-sum and negative-sum
activities of acquiring government aid without creating new wealth. Thus, one of
the unintended consequences of these spending bills was to spark superfluous entre-
preneurial discoveries related to rent seeking, and in the worst cases, bribery and
corruption.10
One of the programs that produced opportunities for superfluous entrepreneurial
discovery was the Federal Pandemic Unemployment Compensation program. Ganong
et al. (2020) found that between April and July of 2020, 76% of laid-off workers eli-
gible for unemployment benefits had replacement rates above 100%, meaning that
they were earning more than they had in their previous jobs. This created disincen-
tive effects for people to return to work. Another problem with the unemployment
benefits was fraudulent claims. Some people saw an entrepreneurial opportunity to
take advantage of unemployment insurance requests because the states’ systems were
often overwhelmed with requests and could not accurately process these benefits.
Moreover, due to the relatively large number of fraudulent claims, authorities in some
states responded by freezing the accounts of people they suspected of illegally receiv-
ing unemployment benefits, but many of those people were innocent, thus placing
additional financial stress on the least fortunate (Chaney Cambon et al. 2020). The
flood of applications overwhelmed state unemployment offices, making it difficult for
applicants to contact them with questions or appeal when their requests were denied.
10
Corruption is not only a harm to society; it also may lead to worse regulations (see Breen and Gilland-
ers 2012).
13
344 S. Haeffele et al.
This meant that while some people received benefits they were not eligible for, others
were left without and had to spend time navigating the system before receiving aid.
The PPP, provided by the Small Business Administration (SBA), was not exempt
from the superfluous discovery process either. PPP was used to distribute up to
$669 billion in loans, which could potentially be forgiven, to businesses (and par-
ticularly small businesses) to keep employees on their payrolls and assist with other
liquidity issues. The program was plagued with issues, from the process design,
communication, evaluation, and distribution. The application process was done on
a “first-come, first-serve” basis and applications quickly exhausted initial funding in
April 2020. As the second wave of funding was released, rules and guidance around
the program evolved (Simon and Rudegeair 2020; Humphries et al. 2020) analyzed
daily surveys of small business owners during this time period and concluded that
the smallest businesses took longer to become aware of the program, and therefore,
were less likely to apply or applied later than bigger businesses. If they did apply,
they waited longer for their decisions and were less likely to get aid. As time went on,
survey respondents became more pessimistic about the future. While PPP seems to
have helped businesses retain employees, avoid bankruptcy, and recover, the small-
est firms (who likely needed that help the most) did not have as much access to
these benefits (ibid.). Similarly, Li (2020) found little evidence that those companies
that were hit hardest by the pandemic were in fact the ones that applied and were
approved for assistance.
Granja et al. (2020), however, found evidence that the PPP did not always meet
its target when measured by the decline in hours worked or number of business shut-
downs. From April to August, $525 billion was distributed, roughly 78% of the allot-
ted funds (Tracy 2020). Months afterward, SBA began surveying recipients of large
loans (over $2 million) on why they needed the funds, highlighting that evaluation
standards may have been overlooked (Omeokwe 2020).
In addition to the unintended consequences from the implementation of the pro-
gram, there were billions of dollars in fraudulent claims (Bailey et al. 2021). Com-
mon tactics in fraud cases included falsifying tax data, inflating payroll numbers,
and applying for multiple companies (ibid.). The SBA inspector general noted that
tens of thousands of businesses that received PPP loans were ineligible because they
were established after the pandemic began, exceeded workforce size requirements,
or owed back taxes (Tracy 2020). In other instances, banks submitted suspicious
activity for multiple government payments going to single accounts (ibid.). For
example, a Florida man was sentenced to 18 months in federal prison for obtaining
over $250,000 in PPP loans by providing false payroll and tax documents on his
company (US Department of Justice 2021a). A Texas man was indicted for receiving
over $3 million in PPP loans across three fabricated businesses and could face over
20 years in prison (US Department of Justice 2021b). A Texas accountant organized
a PPP scheme to get $23 million where he applied for loans for clients and received
over $1 million in fees (Sentendrey 2021). And, shockingly, a Massachusetts man
attempted to fake his own death after getting caught and charged for trying to fraudu-
lently receive over $500,000 in PPP funds (Santucci and Mulvaney 2021; Beggs
and Harvison 2022) found that fraud was fairly common in the investment advisory
industry; they estimate that of the $590 million in PPP funds received by investment
13
The Perils of Regulating COVID–19: Insights from Kirznerian… 345
advisors, more than 6% of those funds consisted of overallocations to firms abusing
the PPP. These examples of superfluous discovery are clear examples of destructive
entrepreneurship, not just a transfer of wealth that could have gone to those in need
and who continue to struggle, but costly to taxpayers through investigations, court
proceedings, and prison sentences.
4 Polycentric Governance can limit the Perils of Regulation
Kirzner has illuminated how the perils of regulation can arise, but insights from the
Bloomington school of political economy clarify how to avoid or mitigate those per-
ils. The Bloomington school’s analysis focuses on polycentric governance systems,
which may provide the most effective way to limit the perils of regulation. Poly-
centric governance systems have multiple overlapping centers of decision-making
power operating within the same rule environment (Ostrom 2005; Aligica and Tarko
2012). Polycentricity is more nuanced than just simple decentralization. Polycentric
systems have a large degree of decentralization, but the nested and interdependent
nature of a polycentric system allows for policies to be made at the appropriate level
for the scale of the social problem (Ostrom 2005; Wagner 2005; Aligica 2019). Addi-
tionally, the various overlapping spheres of decision-making power provide checks
and balances; the higher levels can provide a necessary backstop to failures at the
lower levels, and the lower levels can challenge abuses of power at the higher levels.
Polycentric systems tend to yield several socially beneficial outcomes, and three of
the main benefits are (1) the ability to engage in experimentation and mutual learn-
ing among decentralized jurisdictions, (2) the mitigation of widespread institutional
failures, and (3) interjurisdictional competition (Ostrom 1976, 2010; Aligica 2019).
Experimentation and mutual learning are important for creating regulations
because policymakers are not omniscient. In the face of a crisis, such as a pandemic,
policymakers may not have full information about the nature of a disease, how to
best limit the spread of the disease, or how people will respond to regulations. Policy-
makers may use the advice of highly educated experts, but even experts are fallible.
Experts may fail to foresee the consequences of particular policies, or they may not
properly evaluate the tradeoffs of a policy. Thus, policymakers in many different
jurisdictions can use different approaches to solve similar social dilemmas. Policy-
makers can borrow knowledge from the experiences of other places and tailor their
policies to match their local needs. If policymakers in one jurisdiction fail to achieve
their desired policy outcome, other policymakers can learn what not to do.
When policymaking is centralized, however, fewer opportunities exist for inno-
vation and experimentation, and fewer opportunities exist for mutual learning from
both good and bad examples. For instance, Hall et al. (2020) find that city-county
consolidation can have more negative effects than economies of scale, including
exacerbating differences between rural and urban jurisdictions. When the same
policy is imposed over an entire country, the same types of stifled and superfluous
entrepreneurial discoveries will tend to occur. However, when smaller jurisdictions,
like states, counties, and cities, can make their own policies, they can engage in
mutual learning based on the successes and failures in other jurisdictions. Local poli-
13
346 S. Haeffele et al.
cymakers also have better access to local and tacit knowledge than far-removed ones,
and local policymakers are often more responsive to the demands of their constitu-
ents compared to higher levels (Ostrom 1976, 2005, 2010; Aligica 2019; Lofthouse
2020). Thus, polycentric institutional arrangements help to mitigate the unintended
consequences of stifled and superfluous entrepreneurial discovery that are caused by
particular public policies.
One potential criticism of polycentric systems is that they might not achieve fast
enough results for a pressing public health emergency. Admittedly, the processes
of experimentation and mutual learning take time so that results can be compared
between various jurisdictions. Many of the policy experiments that some jurisdic-
tions attempt will likely fail to achieve their intended goal. However, a more mono-
centric approach is likely be slower than a polycentric one in solving a pressing
public health emergency because monocentric systems can only try one policy at a
time. In other words, the single policy must be enacted, and then policymakers must
wait for the results. If they don’t like the results, they will have to repeal the first pol-
icy, enact another policy, and then wait for the results again. Polycentric systems have
the benefit of comparing many different policy outcomes at the same time, which
hastens the learning process. It would be a mistake to compare an idealized form of
monocentric systems to real-world forms of polycentric systems. When comparing
the relevant alternatives of real-world monocentric system to real-world polycentric
systems under conditions of uncertainty and human fallibility, polycentric systems
generally provide a more conducive environment for learning from mistakes quickly.
The various states’ approaches to mask mandates are one manifestation of the
laboratory of democracy at work. Over the course of the COVID-19 pandemic, dif-
ferent states, counties, and cities experimented with different policies that conformed
to local preferences. Although most states had implemented mask mandates in 2020,
many of them removed the mandates in late 2020 or early 2021. However, as infec-
tions surged at the end of 2021 due to the delta and omicron variants, several states
reinstated their mask mandates. For example, in August 2021, Washington State rein-
stated the indoor mask mandate for all people, with some exceptions for small gath-
erings or office environments where everyone is vaccinated and interaction with the
public is rare. In December 2021, California implemented a new statewide indoor
mask requirement for all people and New York required businesses and venues to
implement a mask requirement or require proof of full vaccination. In January 2022,
New Mexico reinstated its indoor mask mandate for all individuals age two and older
(National Academy for State Health Policy 2022; Markowitz 2022).
On the other end of the spectrum, some states got rid of mask mandates and
banned local governments from imposing mask mandates in 2021. For instance, in
March 2021, the Arkansas governor lifted the mask mandate, and he later approved
a ban on all local governments from imposing mask mandates. However, businesses
can still require patrons to wear masks. In Florida, the governor banned city and
county governments from imposing mask mandates. Even though several cities and
large counties have implemented mask requirements, the governor’s executive order
barred local governments from assessing fines and penalties for noncompliance. In
addition, the Texas governor issued an order banning mask mandates at the county
and city level (National Academy for State Health Policy 2022; Markowitz 2022).
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The Perils of Regulating COVID–19: Insights from Kirznerian… 347
Other states have taken a more moderate approach compared to the extremes of
strict mask mandates or mask mandate bans. In May 2021, the Colorado governor
ended the statewide mandate, but left the mask mandate in place for high-risk areas,
such as nursing homes, prisons, and hospitals, and in certain school settings. Addi-
tionally, Colorado now requires COVID-19 vaccinations to attend indoor, unseated
events with more than 500 people in certain counties. Alaska’s officials strongly
encourage the wearing of masks in public and allow local mask mandates to be
implemented if necessary. Maryland ended its statewide mask mandate in July 2021,
but masks are still required on public transportation and in transit hubs. The city of
Baltimore and the state’s five largest counties have implemented local orders requir-
ing most people to wear masks in indoor public settings (National Academy for State
Health Policy 2022; Markowitz 2022).
In addition to experimentation and mutual learning, polycentric systems also pro-
mote resilience because they protect against institutional failures. Due to uncertainty
that arises in the real world, especially during pandemics, policymakers cannot know
with certainty what is the best or most appropriate course of action. Policy failures
will inevitably happen, and some failures will be worse than others. Polycentric sys-
tems mitigate the scale, scope, and spillovers of policy failures. Failures and errors
may not be perfectly contained to one jurisdiction, but they will be better contained
than if there were just one decision-making center. In highly centralized systems, a
one-size-fits-all policy failure results in the whole system experiencing the failure
(Ostrom 1976, 2005, 2010; Aligica 2019; Lofthouse 2020). Mask mandate bans, such
as those mentioned above in Arkansas, Florida, and Texas, limit polycentric gover-
nance within states because they do not allow local policymakers to tailor rules and
regulations to local circumstances or preferences. As such, the governance system is
less resilient to local challenges that might arise and less responsive to local prefer-
ences that might differ from the prevailing preferences in a state. Polycentric gov-
ernance provides robust and resilient forms of public administration because many
decisions can be made at lower levels, while higher levels provide critical backstops
against failures at the lower levels. For example, when Texas’s governor initially
implemented the mask mandate ban, it included school districts. Many parents and
nonprofit organizations saw this as a policy failure, and as such, they challenged the
ban in court. In November 2021, a federal judge ruled that the executive order prohib-
iting mask mandates in schools violated the Americans with Disabilities Act, which
then gave local officials autonomy to create their own mask policies without risk of
backlash from state authorities (Lopez 2021).
Monocentric systems are more vulnerable to systemic failures than polycentric
ones because of the lack of contestation or alternative sources of governance. One
salient example of monocentric governance is the FDA’s authority over the approval
of rapid antigen COVID tests, also known as at-home tests. Beginning in early to
mid-2020, several companies created rapid at-home tests for COVID. For example,
Irene Bosch and her colleagues at E25Bio quickly developed a test that would detect
the coronavirus in 15 min. On March 21, 2020, Bosch submitted the new COVID
test for FDA emergency authorization (DePillis 2021). However, the FDA did not
approve Bosch’s tests or any others for several months because regulations required
that they must have accuracy similar to standard polymerase chain reaction (PCR)
13
348 S. Haeffele et al.
COVID tests (Bourne 2021; DePillis 2021). PCR tests are highly accurate, but dur-
ing the first several months of the pandemic, PCR tests took multiple days for labs to
process and then disseminate results. Due to concerns with lower accuracy rates and
false negatives, the FDA did not approve the rapid antigen tests (Bourne 2021). On
November 17, 2020, the FDA issued its first emergency use authorization for a rapid
COVID test (US Food and Drug Administration 2020), but authorization for other
tests was slow, resulting in more approvals delayed until spring 2021 (DePillis 2021).
As such, less accurate but socially beneficial rapid antigen tests could not be used
during the first few waves of the COVID-19 pandemic. It is difficult to know exactly
how many lives could have been saved if rapid antigen tests could have been used
much earlier in the pandemic. Thus, the FDA’s monocentric authority to approve or
bar the use of rapid antigen COVID tests led to consequences affecting the entire
United States.
Polycentric systems also allow for interjurisdictional competition, which provides
both incentives and constraints for policymakers to create laws and regulations that
are broadly appealing. Constituents can “vote with their feet” and move to other
jurisdictions where policies better fit their preferences. The freedom to enter and exit
various jurisdictions induces competition so that policymakers have a stronger incen-
tive to produce better policy outcomes. If policymakers choose policies that produce
poor outcomes, constituents are more likely to move to other jurisdictions where
policies are more favorable. Thus, the existence of interjurisdictional competition
means that politicians and bureaucrats have fewer opportunities to engage in oppor-
tunistic behavior because they are disciplined by the potential loss of constituents and
tax revenues (Aligica 2019, 25–32; Lofthouse 2020). Additionally, interjurisdictional
competition helps mitigate abuses of power by limiting the power of any given poli-
cymaker (Ostrom et al. 1961; Ostrom 1979; Wagner 2005).
One potential criticism of interjurisdictional competition is that it could lead to
a “race to the bottom” when it comes to a public health emergency. This concern is
complicated for at least two reasons. First, the term “bottom” implies normatively
undesirable outcomes. However, if there are a diversity of preferences in a popula-
tion, then one person’s undesirable outcome is likely to be another person’s desirable
outcome. Allowing people to sort themselves into jurisdictions that fit their own pol-
icy preferences will give a broad diversity of policy approaches. For example, each
state has different tax rates for sales tax and property tax; we don’t see a “race to the
bottom” where every state decides to eliminate taxation so that they can be competi-
tive. Each state competes on the margin, with some states charging relatively higher
tax rates and providing more public services, while other states charge relatively
lower tax rates and provide fewer public services. Second, if people vote with their
feet for “bad” policies, there could be spillover effects that put everyone else at risk.
However, the nested nature of polycentric systems helps to mitigate this problem of
one jurisdiction’s policies from spilling over onto others. As mentioned previously,
polycentricity is much more complex than simple decentralization. The overlapping
spheres of decision-making power are divided both horizontally and vertically, which
allows different jurisdictions to both compete and cooperate with one another. Addi-
tionally, higher levels can serve as a backstop against decisions at lower levels if
those decisions lead to negative externalities.
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The Perils of Regulating COVID–19: Insights from Kirznerian… 349
During the COVID-19 pandemic, many businesses chose to move their headquar-
ters or other operations to new jurisdictions with more favorable laws and regula-
tions. For example, in December 2021, Tesla moved its headquarters from Palo Alto,
California, to Austin, Texas. Elon Musk, Tesla’s CEO, moved the headquarters due,
in part, to California’s relatively high capital gains taxes, as well as to lower the
cost of living for Tesla employees and to avoid California’s stricter COVID-related
health regulations (Reuter 2021; Reuter and Kiersz 2021; Hiltzik 2021). SnapDNA,
a company that created technology to improve food safety testing, moved its head-
quarters from the San Francisco Bay Area to Broomfield, Colorado. SnapDNA also
considered moving its headquarters to Austin, Texas, but ultimately chose Colorado
due largely to the state’s Job Growth Incentive Tax Credits (Huspeni 2022; Colo-
rado Office of International Development and International Trade 2022). In addition,
Florida has also become a destination for many business headquarters or new busi-
ness branches during the pandemic. Orlando hosts new offices for software company
Civix and Sonesta International Hotels; West Palm Beach has the new headquarters
for hedge fund Elliott Management; and, Miami is a new home for the private-equity
firm Blackstone. The movement to Florida is likely due to a combination of factors,
including less strict COVID restrictions, lower taxes, and Florida’s climate and other
amenities (Dean 2021; Randall 2021).
In addition to business, many individuals moved during the pandemic—roughly
one in ten Americans moved to a new state (Storey and Manansala 2021). In many
cases, the principal reason behind “voting with your feet” in the United States is
for economic prospects. Previous research has shown that people within the United
States tend to migrate to states with higher relative economic freedom (Ashby 2007).
This economic freedom includes lower tax burdens, freer labor markets, less restric-
tive minimum wages, less concentration of unions, and less dependence on public
employment. During the COVID-19 pandemic, evidence suggests that less eco-
nomically free states issued stay-at-home orders earlier than more economically free
states, which was likely a factor in so many people moving during the pandemic
(McCannon and Hall 2021).
The United States’ federated government system is polycentric both vertically and
horizontally. Power is vertically separated among federal, state, county, and city gov-
ernments. Power is also horizontally separated among the executive, legislative, and
judicial branches at each level. Yet, as more activities are regulated, or financed, by
the federal and state level, the United States also exhibits many characteristics of
a more monocentric governance system. These dynamics have real impacts on the
resilience and adaptability of the United States, especially during crises.
5 Conclusion and implications
The COVID-19 pandemic has led to widespread suffering in the United States, both
in terms of lives lost and negative economic impacts. In 2020 and 2021, policymak-
ers at the local, state, and federal levels created policies that were meant to limit
the spread of the virus and also mitigate the pandemic’s economic impacts. Stay-at-
home orders that forced “non-essential” businesses to close and economic stimulus
13
350 S. Haeffele et al.
programs that provided financial assistance to both individuals and firms were broad
types of public policies that affected nearly every American during the pandemic.
These public policies altered the incentives and constraints of entrepreneurs, lead-
ing them to be alert to and take advantage of different profit opportunities. Some
existing entrepreneurial opportunities were stifled by these policies, and other super-
fluous opportunities were created. Thus, the policies that aimed to stop the spread
of COVID-19, such as stay-at-home orders and large economic stimulus programs,
highlight Kirzner’s (1985) “perils of regulation.”
This paper has at least four important implications. First, the market process
perspective provides important insights to understanding the political economy of
COVID-19. Policymakers face epistemic limitations, especially when it comes to
determining which goods and services that consumers want in an ever-changing
world. Knowledge regarding the kinds of goods that consumers want must be discov-
ered through entrepreneurial processes that rely on market prices and the feedback
mechanism of profit and loss. When policymakers assume they have the knowledge
to determine which goods and services are essential, they may create policies that are
accompanied by a host of negative unintended consequences that may harm the very
people they are trying to help.
Second, the costs of COVID-19 policies may be much higher than policymakers
and consumers assume due to the hidden costs of stifled and superfluous discover-
ies. In a normative sense, policymakers should consider the wide variety of unseen
costs that their policies are likely to create. Sound principles of public administra-
tion dictate that policymakers should carefully craft any law or regulation so that a
full accounting of costs and benefits can take place. Kirzner’s line of argumentation
does not rule out a government approach to solving social problems like pandemics,
but Kirzner’s insights should cause policymakers to consider what their policies can
reasonably achieve, given the epistemic limitations of policymakers and the role of
entrepreneurial discovery in the market. The stifled discoveries and superfluous dis-
coveries from the COVID–19 pandemic should serve as a lesson to policymakers in
the future.
Third, seemingly helpful and well-intentioned policies, such as stay-at-home
orders and economic stimulus packages, create opportunities for socially harmful
forms of rent seeking. Such policies are socially harmful when entrepreneurs forgo
positive-sum opportunities of mutually beneficial exchange and instead choose to
engage in negative-sum scenarios of political competition. By recognizing the dan-
gers of policy-driven superfluous discoveries, policymakers can have more tools to
avoid further harms from pandemic policies.
Fourth, the policy responses to COVID-19 have illuminated the need for a poly-
centric approach to policymaking and the potential dangers of a consolidated, one-
size-fits-all approach. Polycentric systems have several benefits for policymaking.
Policymakers can experiment with different policies in their jurisdictions, and policy-
makers in other jurisdictions can learn from the successes and mistakes of their coun-
terparts. Policymakers can then create new policies or tweak existing policies based
on the lessons learned from other jurisdictions. In addition, polycentric systems limit
any institutional failures in one jurisdiction from spilling over onto other jurisdic-
tions. If normatively undesirable outcomes of stifled or superfluous discovery arise in
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The Perils of Regulating COVID–19: Insights from Kirznerian… 351
one jurisdiction, the negative consequences are largely contained to that place. If all
policymaking was centralized at the national level, institutional failures and negative
unintended consequences apply to everyone in a nation.
References
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Authors and Affiliations
Stefanie Haeffele1 · Jordan K. Lofthouse1 · Agustin Forzani2
Stefanie Haeffele
shaeffele@mercatus.gmu.edu
Jordan K. Lofthouse
jlofthouse@mercatus.gmu.edu
1
Mercatus Center at George Mason University, Fairfax, VG, USA
2
Mercatus Center at George Mason University, Arlington, VG, USA
13
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