A Contract for New Vaccine R&D under COVID-19

Abstract

This paper analyzes an incentive contract for new vaccine research and development (R&D) under a pandemic situation such as COVID-19. We study how a public sector (such as a government) designs an R&D contract and offers it to pharmaceutical enterprises. A simply agency-theoretic model is employed to explore the contract whose terms are an upfront grant as a fixed fee and a sales tax credit as an incentive tool. Examining how the values of related parameters affect contract term determinations, we found conditions that increase or decrease the tax credit and fixed fee. Unlike the general arguments from existing studies of incentive contracts, the role of a fixed fee outweighs the role of a tax credit for new vaccine development under pandemics. We also found that risk averseness and an in ated approval likelihood play significant roles in terms of the tax credit and fixed fee, respectively.

Keywords: New Product R&D, Contract Design, Tax Credit, Agency Theory, COVID-19