Advance Market Commitment: Some Issues and a Bad Remedy

Abstract:     
We carry out a strategic analysis of Advance Market Commitments, used in practice to foster R\&D in innovative treatments for neglected diseases. We first show that current AMCs suffer from a severe Time Inconsistency problem, and that a rational pharmaceutical company behaves in equilibrium as if no suchmechanism were available. We propose a mechanism that removes this inconsistency, and we describe its inherent problems. We then show that, when a realistic assumption holds, the optimal AMC with credible commitment always leads in equilibrium to the lowest acceptable chance of having a successful medical innovations,
given announced compensations.

Number of Pages in PDF File: 23

Keywords: neglected diseases, incentive mechanisms, time inconsistency, optimal mechanism

JEL Classification: I1, I3, G15

working papers series