IDEAS home Printed from https://ideas.repec.org/p/bfi/wpaper/2020-175.html
   My bibliography  Save this paper

Designing Advance Market Commitments for New Vaccines

Author

Listed:
  • Michael Kremer

    (University of Chicago - Department of Economics; NBER)

  • Jonathan D. Levin

    (Stanford University - Graduate School of Business; NBER)

  • Christopher M. Snyder

    (Dartmouth College - Department of Economics; NBER)

Abstract

Advance market commitments (AMCs) provide a mechanism to stimulate investment by suppliers of products to low-income countries. In an AMC, donors commit to a fund from which a specified subsidy is paid per unit purchased by low-income countries until the fund is exhausted, strengthening suppliers' incentives to invest in research, development, and capacity. Last decade saw the launch of a $1.5 billion pilot AMC to distribute pneumococcal vaccine to the developing world; in the current pandemic, variations on AMCs are being used to fund COVID-19 vaccines. This paper undertakes the first formal analysis of AMCs. We construct a model in which an altruistic donor negotiates on behalf of a low-income country with a vaccine supplier after the supplier has sunk investments. We use this model to explain the logic of an AMC—as a solution to a hold-up problem—and to analyze alternative design features under various economic conditions (cost uncertainty, supplier competition). A key finding is that optimal AMC design differs markedly depending on where the product is in its development cycle.

Suggested Citation

  • Michael Kremer & Jonathan D. Levin & Christopher M. Snyder, 2020. "Designing Advance Market Commitments for New Vaccines," Working Papers 2020-175, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2020-175
    as

    Download full text from publisher

    File URL: https://repec.bfi.uchicago.edu/RePEc/pdfs/BFI_WP_2020175.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael Kremer, 1998. "Patent Buyouts: A Mechanism for Encouraging Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1137-1167.
    2. Kremer, Michael R., 1998. "Patent Buyouts: A Mechanism for Encouraging Innovation," Scholarly Articles 3693705, Harvard University Department of Economics.
    3. Donald W Light, 2005. "Making Practical Markets for Vaccines," PLOS Medicine, Public Library of Science, vol. 2(10), pages 1-1, September.
    4. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 1049-1090.
    5. Galasso, Alberto & Mitchell, Matthew & Virag, Gabor, 2016. "Market outcomes and dynamic patent buyouts," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 207-243.
    6. Ernst R. Berndt & Rachel Glennerster & Michael R. Kremer & Jean Lee & Ruth Levine & Georg Weizsäcker & Heidi Williams, 2007. "Advance market commitments for vaccines against neglected diseases: estimating costs and effectiveness," Health Economics, John Wiley & Sons, Ltd., vol. 16(5), pages 491-511, May.
    7. Michael Kremer & Jonathan Levin & Christopher M. Snyder, 2020. "Advance Market Commitments: Insights from Theory and Experience," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 269-273, May.
    8. Michael Kremer & Heidi Williams, 2010. "Incentivizing Innovation: Adding to the Tool Kit," NBER Chapters, in: Innovation Policy and the Economy, Volume 10, pages 1-17, National Bureau of Economic Research, Inc.
    9. E. Glen Weyl & Jean Tirole, 2012. "Market Power Screens Willingness-to-Pay," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(4), pages 1971-2003.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chad P. Bown & Thomas J. Bollyky, 2022. "How COVID‐19 vaccine supply chains emerged in the midst of a pandemic," The World Economy, Wiley Blackwell, vol. 45(2), pages 468-522, February.
    2. Lyons, Benjamin Frederick & Levin, Michael, 2024. "Cognitive Glues Are Shared Models of Relative Scarcities: The Economics of Collective Intelligence," OSF Preprints 3fdya_v1, Center for Open Science.
    3. Snyder, Christopher M. & Hoyt, Kendall & Gouglas, Dimitrios, 2023. "An optimal mechanism to fund the development of vaccines against emerging epidemics," Journal of Health Economics, Elsevier, vol. 91(C).
    4. Batabyal, Amitrajeet & Beladi, Hamid, 2022. "City and Regional Demand for Vaccines Whose Supply Arises from Competition in a Bertrand Duopoly," MPRA Paper 113758, University Library of Munich, Germany, revised 28 Jun 2022.
    5. Wang, Jian & Jiang, Wenjing & Wu, Xinpei & Yang, Mengdie & Shao, Wei, 2023. "Role of vaccine in fighting the variants of COVID-19," Chaos, Solitons & Fractals, Elsevier, vol. 168(C).
    6. Dewatripont, Mathias, 2022. "Which policies for vaccine innovation and delivery in Europe?," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    7. Zéphirin Nganmeni & Roland Pongou & Bertrand Tchantcho & Jean‐Baptiste Tondji, 2022. "Vaccine and inclusion," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 1101-1123, October.
      • Zéphirin Nganmeni & Roland Pongou & Bertrand Tchantcho & Jean‐baptiste Tondji, 2022. "Vaccine and inclusion," Post-Print hal-04257703, HAL.
      • Zéphirin Nganmeni & Roland Pongou & Bertrand Tchantcho & Jean-Baptiste Tondji, 2022. "Vaccine and Inclusion," Working Papers 2202E Classification-C62,, University of Ottawa, Department of Economics.
    8. Ockenfels Axel, 2021. "Marktdesign für eine resiliente Impfstoff-produktion," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 22(3), pages 259-269, September.
    9. Ruchir Agarwal & Tristan Reed, 2022. "Financing vaccine equity: funding for day-zero of the next pandemic," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 38(4), pages 833-850.
    10. Ahlvik, Lassi & van den Bijgaart, Inge, 2024. "Screening green innovation through carbon pricing," Journal of Environmental Economics and Management, Elsevier, vol. 124(C).
    11. Wang, Fan & Xu, Danni & Zhuo, Xiaopo & Zhang, Chao & Liu, Yaoqi, 2022. "Improving consumer welfare in vaccine market: Pricing, government subsidies and consumer awareness," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 167(C).
    12. Michel Callon & Alvin E. Roth, 2021. "The design and performation of markets: a discussion," AMS Review, Springer;Academy of Marketing Science, vol. 11(3), pages 219-239, December.
    13. Christopher Norio Avery & David McAdams, 2024. "The economics of epidemics: introduction to the special issue," Review of Economic Design, Springer;Society for Economic Design, vol. 28(4), pages 631-637, December.
    14. Lyons, Benjamin Frederick & Levin, Michael, 2024. "Cognitive Glues Are Shared Models of Relative Scarcities: The Economics of Collective Intelligence," OSF Preprints 3fdya, Center for Open Science.
    15. Michael Kremer & Christopher M. Snyder & Jonathan Levin, 2023. "Authors' response to Unjournal evaluations of "Advance Market Commitments: Insights from Theory and Practice"," The Unjournal Evaluations 2023-25, The Unjournal.
    16. Burak Kazaz & Scott Webster & Prashant Yadav, 2023. "Increasing the supply of health products in underserved regions," Production and Operations Management, Production and Operations Management Society, vol. 32(12), pages 4212-4228, December.
    17. Rachel Glennerster & Thomas Kelly & Claire T. McMahon & Christopher M. Snyder, 2024. "Quantifying the social value of a universal COVID-19 vaccine and incentivizing its development," Review of Economic Design, Springer;Society for Economic Design, vol. 28(4), pages 723-761, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Snyder, Christopher M. & Hoyt, Kendall & Gouglas, Dimitrios, 2023. "An optimal mechanism to fund the development of vaccines against emerging epidemics," Journal of Health Economics, Elsevier, vol. 91(C).
    2. Dubois, Pierre & Moisson, Paul-Henri & Tirole, Jean, 2022. "The Economics of Transferable Patent Extensions," TSE Working Papers 22-1377, Toulouse School of Economics (TSE), revised Dec 2022.
    3. Mueller-Langer, Frank, 2013. "Neglected infectious diseases: Are push and pull incentive mechanisms suitable for promoting drug development research?," Health Economics, Policy and Law, Cambridge University Press, vol. 8(2), pages 185-208, April.
    4. Galasso, Alberto & Mitchell, Matthew & Virag, Gabor, 2018. "A theory of grand innovation prizes," Research Policy, Elsevier, vol. 47(2), pages 343-362.
    5. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers 13-001, Stanford Institute for Economic Policy Research.
    6. Ahlvik, Lassi & van den Bijgaart, Inge, 2024. "Screening green innovation through carbon pricing," Journal of Environmental Economics and Management, Elsevier, vol. 124(C).
    7. Galasso, Alberto, 2020. "Rewards versus intellectual property rights when commitment is limited," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 397-411.
    8. Kyle, Margaret K., 2022. "Incentives for pharmaceutical innovation: What’s working, what’s lacking," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    9. Cozzi, Guido, 2022. "Shall we fear a Patent Waiver? Not for Covid-19 Vaccines," MPRA Paper 111990, University Library of Munich, Germany.
    10. Eric Budish & Benjamin N. Roin & Heidi Williams, 2015. "Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials," American Economic Review, American Economic Association, vol. 105(7), pages 2044-2085, July.
    11. Iain M. Cockburn & Jean O. Lanjouw & Mark Schankerman, 2016. "Patents and the Global Diffusion of New Drugs," American Economic Review, American Economic Association, vol. 106(1), pages 136-164, January.
    12. Yeon-Koo Che & Elisabetta Iossa & Patrick Rey, 2021. "Prizes versus Contracts as Incentives for Innovation [Subgame Perfect Implementation Under Information Perturbations]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2149-2178.
    13. Michael Kremer & Heidi Williams, 2010. "Incentivizing Innovation: Adding to the Tool Kit," NBER Chapters, in: Innovation Policy and the Economy, Volume 10, pages 1-17, National Bureau of Economic Research, Inc.
    14. Ben van Hout & Jolian McHardy & Aki Tsuchiya, 2015. "Patent Purchase as a Policy for Pharmaceuticals," Working Papers 2015007, The University of Sheffield, Department of Economics.
    15. Onur Bayar & Thomas J. Chemmanur & Mark H. Liu, "undated". "How to Motivate Fundamental Innovation: Subsidies versus Prizes and the Role of Venture Capital," Working Papers 0175fin, College of Business, University of Texas at San Antonio, revised 06 Jan 2016.
    16. Galasso, Alberto & Mitchell, Matthew & Virag, Gabor, 2016. "Market outcomes and dynamic patent buyouts," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 207-243.
    17. Agarwal, Ruchir & Gaule, Patrick, 2022. "What drives innovation? Lessons from COVID-19 R&D," Journal of Health Economics, Elsevier, vol. 82(C).
    18. Mueller-Langer, Frank, 2011. "Neglected infectious diseases: are push and pull incentive mechanisms suitable for promoting research?," MPRA Paper 40193, University Library of Munich, Germany.
    19. Linda Cohen & Amihai Glazer, 2014. "Forward Markets to Spur Innovation," Working Papers 131405, University of California-Irvine, Department of Economics.
    20. repec:spo:wpmain:info:hdl:2441/eu4vqp9ompqllr09iatrhegan is not listed on IDEAS
    21. Dominique Foray, 2022. "The Economics of Incomplete Plan -on Conditions, Procedures and Design of Future Mission- Oriented Innovation Policies," Hacienda Pública Española / Review of Public Economics, IEF, vol. 243(4), pages 123-146, December.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bfi:wpaper:2020-175. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Toni Shears The email address of this maintainer does not seem to be valid anymore. Please ask Toni Shears to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/mfichus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.