Working Paper: NBER ID: w30619
Authors: Christopher M. Snyder; Kendall Hoyt; Dimitrios Gouglas
Abstract: We derive the optimal funding mechanism to incentivize development and production of vaccines against diseases with epidemic potential. In the model, suppliers' costs are private information and investments are noncontractible, precluding cost-reimbursement contracts, requiring fixed-price contracts conditioned on delivery of a successful product. The high failure risk for individual vaccines calls for incentivizing multiple entrants, accomplished by the optimal mechanism, a (w+1)-price reverse Vickrey auction with reserve. Our analysis determines the optimal number of entrants and required funding level. Based on a distribution of supplier costs estimated from survey data, we simulate the optimal mechanism's performance in scenarios ranging from a small outbreak, causing harm in the millions of dollars, to the Covid-19 pandemic, causing harm in the trillions. We assess which mechanism features contribute most to its optimality.
Keywords: Vaccines; Public Funding; Epidemics; Optimal Mechanisms
JEL Codes: D47; H44; I18; L65; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal funding mechanism (H81) | incentivize development and production of vaccines (O31) |
| funding mechanism structure (G32) | number of successful vaccine developments (I15) |
| w-winner reverse Vickrey auction (D44) | ensures truthful bidding (D44) |
| w-winner reverse Vickrey auction (D44) | minimizes moral hazard (G52) |
| higher social benefits (H55) | increased participation and funding levels (I24) |
| mechanism design (D47) | economic efficiency of vaccine procurement (D61) |