Most economists would agree that the positive externalities caused by prevention of
infectious disease create a prima facie case for subsidies. However, little is known about the appropriate magnitude of these subsidies, or about whether the level of such subsidies should vary across diseases. We integrate a standard epidemiological model with an economic model of consumer and producer behavior to address these questions. Across a continuum of market structures, we find that the equilibrium steady-state marginal externality is non-monotonic in disease transmissiblity, peaking when the disease is just transmissible enough to survive in steady-state. This pattern implies that marginal externalities—and, as we show, optimal subsidies—are higher for serious but rare diseases relative to diseases with lower individual burden but higher disease prevalence. Crude calibrations suggest that optimal subsidies for technologies such as vaccines, condoms, and mosquito nets, which prevent infectious diseases, may be very large relative to current levels.
Abstract: Advance market commitments (AMCs) have been proposed as mechanisms to stimulate investment by suppliers of products to low-income countries, where familiar mechanisms such as patents and prizes can fall short. 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. A $1.5 billion pilot AMC was undertaken to speed the roll out of a pneumococcus vaccine to the developing world covering additional strains prevalent there.
This paper undertakes the first formal analysis of AMCs. We construct a model in which an altruistic donor bargains with a supplier on behalf of a low-income country over vaccine price and quantity ex post, after the supplier has sunk ex ante investments. We use this model to explain the broad logic of an AMC—as a solution to a hold-up problem—as well as to analyze specific features of the pilot’s design that we argue enhance its efficiency. We study a variety of design features including capacity forcing, supply commitments, price ceilings, and accrued interest, and consider a variety of economic environments including competing suppliers, competing demand from middle-income countries outside the program. We show that optimal AMC design differs markedly depending on where the product is in its development cycle.
We study asset collateralized loans for water tanks in Kenya. On replacing loans with high down payments and stringent guarantor requirements with the asset collateralized loans, the take-up of loans increased from 2.4% to 41.9% and we show that the loans had real impacts on households. A Karlan-Zinman test based on waiving borrowing requirements ex post finds evidence of adverse selection with lowered deposit requirements, but no evidence of moral hazard. A simple model and rough calibration suggests that adverse selection may deter lenders from making welfare-improving loans with lower deposit requirements, even after introducing asset collateralization.
Ahuja, Amrita, Sarah Baird, Joan Hamory Hicks, Michael Kremer, and Edward Miguel. 2017. “Economics of Mass Deworming Programs.” Disease Control Priorities: Child and Adolescent Health and Development 8: 413-422.