innovation economics (pt. 1): “pull” mechanisms, mostly prizes stephen m. maurer designing...
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Innovation Economics (Pt. 1):Innovation Economics (Pt. 1):““Pull” Mechanisms, Mostly Prizes Pull” Mechanisms, Mostly Prizes
Stephen M. Maurer
Designing Strategies for Neglected Disease ResearchLaw 284.26
Public Policy 190/290
“Never Believe an Experiment Until It’s Confirmed in Theory.”
A.S. Eddington
A First Principles ApproachA Different Way to Think About InnovationBinning and Comparing Ad hoc arguments Push & Pull
Next Three Lectures: Big PictureLater: Nuts-and-Bolts
Introduction
Review: Social ChallengesEx Ante Efficiency
(v - c)
Ex Post Efficiency“Access”
Eliciting Privately Held Information
Agency Problems (Sponsors)
Agency Problems (Researchers)
(Political Feasibility)
Review
ToolboxBoosted Demand PrizesAdvanced Purchase CommitmentsGrantsPrivate Public PartnershipsContract R&DOpen 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?
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” problemFixes
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 KnowledgeBasic Idea: Asking the WorldDetails: Knowledge Distributed Between
Firms, Knowledge as Experience Good.
Agency Problems:
Sponsors
Agency Problems:
Researchers
Ex AnteEfficiency (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 AnteEfficiency (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:)
PoliticsPayment is Deferred (Less Visible)
No formal commitment neededBlame the private sector!Politics is costly!
√ ?
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
PrizesEx Ante Efficiency
2. How Much Effort?
… for one company?Minimum R&D Cost
… for two companies?< R&D Cost > + ε
“Competing Away the Profits”
Congress and PatentsThe $800 million pill.Prejudices: Occam’s Razor,
Looking Under the Lamppost, and Conspiracy Theories.
PrizesEx 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.
PrizesEx Ante Efficiency
2. How much effort? Ctd…
Picking a Dollar Reward
The Accounting AnswerRich Nations R&D IntensityA Bare Bones Program?
Would a Smaller Prize Work?Internal FinancingA Very Alarming Result…
PrizesEx Ante Efficiency
3. Second Generation & Me-Too DrugsIs 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 KnowledgePublic 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 AnteEfficiency (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 AwardsDALYsTournamentSpecification/First-past-the-post.
TradeoffsEnforceability vs. changing costs/needs.Enforceability vs. maximum value.
Economies of scaleLarge budgets and repeat games.
Prizes
Agency Problems:
Sponsors
Agency Problems:
Researchers
Ex AnteEfficiency (v-c)
?
Eliciting Privately
Held Knowledge
Ex Post Efficiency
“Access”
√ √ ?
(Politics:)
Agency Problems (Researchers) Why We Like “Pull” IncentivesAccess to FinancingSpecial 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 AboveNo Patent RequiredPatents + Prizes ???
(Politics:)
Prizes
√ √ √
Agency Problems:
Sponsors
Agency Problems:
Researchers
Ex Ante Efficiency (v-c)
Eliciting Privately
Held Knowledge
Ex Post Efficiency
“Access”
√ √ √ √
PoliticsPayment is Deferred (Less Visible)Blame the private sector!“Prizes are like the patent system”
Prizes
√ ?
(Politics:)
Advanced Purchase Commitments
APCs
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
Grants
Grants
Ex Ante EfficiencyNo 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: SponsorsUp-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: ResearchersGrant 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: AccessSee 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 valueTaking advantage of rich nation revenuesPolitics
But…Crowding out.Making claims on sponsor’s future budget