Designing Advance Market Commitments for New Vaccines

63 Pages Posted: 7 Dec 2020 Last revised: 27 Jun 2021

See all articles by Michael Kremer

Michael Kremer

Harvard University

Jonathan Levin

Stanford Graduate School of Business; Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Christopher M. Snyder

Dartmouth College - Department of Economics; National Bureau of Economic Research

Date Written: December 2020

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

Kremer, Michael and Levin, Jonathan D. and Snyder, Christopher M., Designing Advance Market Commitments for New Vaccines (December 2020). NBER Working Paper No. w28168, Available at SSRN: https://ssrn.com/abstract=3743901

Michael Kremer (Contact Author)

Harvard University

Jonathan D. Levin

Stanford Graduate School of Business ( email )

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