Incentives for Accelerating the Production of Covid-19 Vaccines in the Presence of Adjustment Costs
Delays in the availability of vaccines are very costly for society but existing fixed price contracts provide no incentives for producers to speed up delivery: a dose delivered tomorrow receives the same price as a dose delivered in the next quarter. The benefits for early delivery are huge for society, but non-existent for suppliers. A better contract would have the price fully variable over time. In this policy brief, the authors show that it is straightforward to design an optimal contract, which aligns the time paths of the price with that of the social value of a vaccination. There is a clear policy conclusion: contracts should contain incentives for accelerated production. Vaccines delivered early should command a higher price.
Delays in the availability of vaccines are costly as the pandemic continues. However, in the presence of adjustment costs firms have an incentive to increase production capacity only gradually. The existing contracts specify only a fixed quantity to be supplied over a certain period and thus provide no incentive for an accelerated buildup in capacity. A high price does not change this. The optimal contract would specify a decreasing price schedule over time which can replicate the social optimum.
Claudius Gros, Daniel Gros: "Incentives for Accelerating the Production of Covid-19 Vaccines in the Presence of Adjustment Costs", EconPol Policy Brief 33, February 2021