Incentivizing compliance behaviors with investment goods in pandemic preparedness and resilience

Abstract

ABSTARCT To understand non-compliance behaviors in investment goods in pandemic preparedness and resilience, we resort to a form of bounded rationality that people suffer from a lack of self-control due to “present bias”, and differ in their sophistication levels (the degree to which they are aware of such compliance barriers). We focus on (i) the manufacturer’s pricing strategy under an advance selling framework, and (ii) the subsidy policy to mitigate under-adoption, to generate operational insights. We show that subsidizing the manufacturer is more cost-effective than subsidizing consumers, because the latter subsidy will not fully trickle down to consumers when the manufacturering manipulates prices in response. In particular, when the subsidy program is budget-constrained, the manufacturer subsidy should be provided only in the spot period. In contrast, when the budget constraint is relaxed, subsidies in both periods should be provided. Surprisingly, such a subsidy program has non-monotone impacts on consumers’ adoption quantities. Intuitively, this is because the spot-period subsidy induces consumers’ non-compliance behaviors in the advance period. In response, the manufacturer/seller will shift to a pricing strategy that may further reduce the advance-selling quantity. This result provides a natural explanation to reconcile the mixed effects of adoption subsidies.