Abstract
Accelerating the availability of COVID-19 vaccines is critical to preventing further waves and mitigating the impact on society. However, preparations for large-scale manufacturing, such as building production facilities, are typically delayed until a vaccine is proven safe and effective. This makes sense from a commercial perspective, but incurs great costs in terms of lives lost and damage to the economy. Several policy options are available to reduce this delay, all of which involve incentives or subsidies to invest in production facilities. We review existing approaches, then propose a novel alternative using "option-based guarantees" in which the government commits to paying a proportion of the manufacturer's preparation costs should the product turn out not to be viable. Counterintuitively, this "payment for failure" is appropriate because in the case of success, a company makes a profit from the product itself, and does not need additional money from the government. While other approaches have critical roles, we argue that option-based guarantees are the most promising approach to ensuring a rapid vaccine for COVID-19. Compared to the alternative approaches, they reduce both costs to the government and risk to the companies, while maintaining an incentive to produce a high-quality product quickly and at scale.
Highlights
Accelerating the availability of COVID-19 vaccines is critical to preventing further waves and mitigating the impact on society
A variant on advance market commitments (AMCs) proposed by Athey et al.[8] to address COVID-19 would combine the direct investments (“push”) of private partnerships (PPPs) with the typical AMC mechanism of a precommitment to purchase (“pull”) the first resulting product to come to market
In the case of vaccines for COVID-19, we think that optionbased guarantees for constructing production facilities would have been, and still may be, the best alternative for candidates that are promising but whose viability, large-scale manufacturing methods, and/or quantity required are substantially uncertain
Summary
Potential solutions For a pressing need like COVID-19 vaccines, a solution to the market failure provided by government or another organization must address multiple economic problems simultaneously It needs to create incentives for companies and investors to take on high-risk projects, many of which have individually low probabilities of success. A variant on AMC proposed by Athey et al.[8] to address COVID-19 would combine the direct investments (“push”) of PPPs with the typical AMC mechanism of a precommitment to purchase (“pull”) the first resulting product to come to market This push-pull approach improves on both direct investment and PPPs; but because the government funding for purchasing may be exhausted before it reaches market, it has drawbacks similar to prize competitions in that it leaves companies with the bulk of the risk from overproduction if they are not first to market. If price controls or similar constraints are desired, they do not need to be tied to funding mechanisms
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