Innovation Economics (Pt. 1): “Pull” Mechanisms, Mostly Prizes

1. Designing Strategies for Neglected Disease Research Law 284.26 Public Policy 190/290 Innovation Economics (Pt. 1): “Pull” Mechanisms, Mostly Prizes Stephen M. Maurer

2. Introduction “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

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

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

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

6. Boosted Demand A Warm-Up Exercise

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

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

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

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

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

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

13. Prizes Today’s Main Event

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

15. Prizes Ex 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 Patents The $800 million pill. Prejudices: Occam’s Razor, Looking Under the Lamppost, and Conspiracy Theories.

16. 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.

17. 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…

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

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

20. Prizes 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

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

22. 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.

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

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

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

26. APCs Advanced Purchase Commitments

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

28. Grants Grants

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

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

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

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

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

34. 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