Innovation Economics (Pt. 1): “Pull” Mechanisms, Mostly Prizes Stephen M. Maurer Designing Strategies for Neglected Disease Research Law Public Policy 190/290

“Never Believe an Experiment Until It’s Confirmed in Theory.” A.S. Eddington A First Principles Approach A Different Way to Think About Innovation Binning and Comparing Ad hoc arguments Push & Pull Next Three Lectures: Big Picture Later: Nuts-and-Bolts Introduction

Review: Social Challenges Ex Ante Efficiency (v - c) Ex Post Efficiency “Access” Eliciting Privately Held Information Agency Problems (Sponsors) Agency Problems (Researchers) (Political Feasibility) Review

Toolbox Boosted Demand Prizes Advanced Purchase Commitments Grants Private Public Partnerships Contract R&D Open Source Review

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ???? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Another Cartoon ?? (Politics:) All innovation mechanisms have strengths and weaknesses. What are the main social challenges?

A Warm-Up Exercise Boosted Demand

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ???? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Boosted Demand ?? (Politics:) Ex Ante Efficiency (v - c) The “sunk costs” problem Fixes Signaling with current budgets. Make the promise enforceable?

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ??? Eliciting Privately Held Knowledge: Ex Post Efficiency “Access” Boosted Demand √ ? (Politics:) ? Eliciting Private Knowledge Basic Idea: Asking the World Details: Knowledge Distributed Between Firms, Knowledge as Experience Good.

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ?? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Boosted Demand √ ? √ (Politics:) ? Agency Problems (Sponsors) See Above!

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Boosted Demand √ ? √ ? (Politics:) Agency Problems (Researchers) Why We Like “Pull” Incentives √

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Boosted Demand √√ √ ? Ex Post Efficiency (“Access”) Patented drugs. ? (Politics:) √

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Boosted Demand √√ √ √ (Politics:) Politics Payment is Deferred (Less Visible) No formal commitment needed Blame the private sector! Politics is costly! √ ?

Today’s Main Event Prizes

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ???? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Prizes ?? (Politics:) Ex Ante Efficiency 1. What Kind of Effort? Blue Sky Prizes (DALYs Saved, Market tests…) Directed prizes

Prizes Ex Ante Efficiency 2. How Much Effort? … for one company? Minimum R&D Cost … for two companies? + ε “Competing Away the Profits” Congress and Patents The $800 million pill. Prejudices: Occam’s Razor, Looking Under the Lamppost, and Conspiracy Theories.

Prizes Ex Ante Efficiency 2. How Much Effort? Ctd… Pitfalls: Can set (v - c) < 0 Not the patent system ! Setting c too high: Racing, duplication, diminishing returns, and Rent-seeking. Low cost providers.

Prizes Ex Ante Efficiency 2. How much effort? Ctd… Picking a Dollar Reward The Accounting Answer Rich Nations R&D Intensity A Bare Bones Program? Would a Smaller Prize Work? Internal Financing A Very Alarming Result…

Prizes Ex Ante Efficiency 3. Second Generation & Me-Too Drugs Is v lower? c lower? Should the first generation winner share the reward? Prizes based on sales are not the Patent System Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ???? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ? (Politics:) √

Eliciting Privately Held Knowledge 1. What Kinds of Knowledge? Example: DALYs vs. Drug Specs Prizes Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge: Ex Post Efficiency “Access” (Politics:) ??? √ ??

Eliciting Private Knowledge What Kinds of Knowledge? Social vs. Science Knowledge Public Health Knowledge Pharma has… Drug expertise/proprietary data. Marketing & Psyching Out FDA But not… Psyching Out the UN Prizes

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ?? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √ ? √ (Politics:) ? Agency Problems (Sponsors) Sponsors Pay a Premium for Mistrust! Prizes

Agency Problems (Sponsors), ctd. … Common Examples of Prizes: Discretionary Awards DALYs Tournament Specification/First-past-the-post. Tradeoffs Enforceability vs. changing costs/needs. Enforceability vs. maximum value. Economies of scale Large budgets and repeat games. Prizes

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? (Politics:) Agency Problems (Researchers) Why We Like “Pull” Incentives Access to Financing Special Problem: Tournaments Prizes √ ?

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? Ex Post Efficiency (“Access”) See Above No Patent Required Patents + Prizes ??? (Politics:) Prizes √√√

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ √ √ Politics Payment is Deferred (Less Visible) Blame the private sector! “Prizes are like the patent system” Prizes √ ? (Politics:)

Advanced Purchase Commitments APCs

Special Problems: Eliciting Privately Held Knowledge Why an IAC? Two-Stage Games Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ √ √ ? (Politics:) √

Grants

Ex Ante Efficiency No attempt to judge “c” But: No internal financing problem! Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √ ? (Politics:) ????

Grants Eliciting Privately Held Knowledge Agency Problems: Sponsors Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge √√ Short-term suppression, but reasonably quick disclosure. Agency Problems: Researchers Ex Post Efficiency “Access” ? (Politics:) ???

Grants Agency Problems: Sponsors Up-front or periodic payments Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? (Politics:) √ ??

Grants Agency Problems: Researchers Grant budget vs. Idea Quality S. Maurer & S. Scotchmer, “Procuring Knowledge,” in G. Libecap (ed.), Advances in the Study of Entrepreneurship, Innovation and Growth: Vol. 15, at p. 1 (JAI Press 2004). Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? (Politics:) √ ? √

Grants Ex Post Efficiency: Access See above! Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? (Politics:) √√√

Adding Patents Why you might want patents after all… Sponsor can’t judge value Taking advantage of rich nation revenues Politics But… Crowding out. Making claims on sponsor’s future budget