Innovation Economics Pt' 1:

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Designing Strategies for Neglected Disease
Research Law 284.26 Public Policy 190/290
Innovation Economics (Pt. 1) Pull Mechanisms,
Mostly Prizes
Stephen M. Maurer
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Introduction
Never Believe an Experiment Until Its
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
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Review
Review Social Challenges Ex Ante Efficiency
(v - c) Ex Post Efficiency Access Eliciting
Privately Held Information Agency Problems
(Sponsors) Agency Problems (Researchers) (Politi
cal Feasibility)
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Review
Toolbox Boosted Demand Prizes Advanced Purchase
Commitments Grants Private Public
Partnerships Contract RD Open Source
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Another Cartoon

Agency Problems Researchers
Agency Problems Sponsors
Ex Post Efficiency Access
Eliciting Privately Held Knowledge
Ex Ante Efficiency (v-c)
(Politics)
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All innovation mechanisms have strengths and
weaknesses. What are the main social challenges?
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Boosted Demand
A Warm-Up Exercise
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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)
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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)
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?
?
v
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?
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Boosted Demand
Agency Problems (Sponsors) See Above!
Ex Post Efficiency Access
Agency Problems Sponsors
Ex Ante Efficiency (v-c)
Eliciting Privately Held Knowledge
Agency Problems Researchers
(Politics)
?
?
v
?
?
v
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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)
?
v
?
v
?
v
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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)
v
v
?
?
v
v
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Boosted Demand
Politics Payment is Deferred (Less Visible) No
formal commitment needed Blame the private
sector! Politics is costly!
Agency Problems Researchers
Eliciting Privately Held Knowledge
Ex Post Efficiency Access
Agency Problems Sponsors
Ex Ante Efficiency (v-c)
(Politics)
v
v
v
v
?
v
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Prizes
Todays Main Event
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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)
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?
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Prizes
Ex Ante Efficiency 2. How Much Effort? for
one company? Minimum RD Cost for two
companies? lt RD Cost gt e Competing Away
the Profits Congress and Patents The 800
million pill. Prejudices Occams
Razor, Looking Under the Lamppost, and
Conspiracy Theories.
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Prizes
Ex Ante Efficiency 2. How Much Effort?
Ctd Pitfalls Can set (v - c) lt 0 Not the
patent system ! Setting c too high Racing,
duplication, diminishing returns, and
Rent-seeking. Low cost providers.
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Prizes
Ex Ante Efficiency 2. How much effort?
Ctd Picking a Dollar Reward The Accounting
Answer Rich Nations RD Intensity A Bare Bones
Program? Would a Smaller Prize Work? Internal
Financing A Very Alarming Result
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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)
?
?
?
?
?
v
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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)
?
?
?
v
?
?
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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
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Prizes
Agency Problems (Sponsors) Sponsors Pay a
Premium for Mistrust!
Ex Post Efficiency Access
Agency Problems Sponsors
Ex Ante Efficiency (v-c)
Eliciting Privately Held Knowledge
Agency Problems Researchers
(Politics)
?
?
v
?
?
v
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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.
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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)
?
v
v
?
v
?
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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)
v
v
?
v
v
v
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Prizes
Politics Payment is Deferred (Less
Visible) Blame the private sector! Prizes are
like the patent system
Agency Problems Researchers
Eliciting Privately Held Knowledge
Ex Post Efficiency Access
Agency Problems Sponsors
Ex Ante Efficiency (v-c)
(Politics)
v
v
v
v
?
v
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APCs
Advanced Purchase Commitments
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APCs
Special Problems Eliciting Privately Held
Knowledge Why an IAC? Two-Stage Games
Agency Problems Researchers
Eliciting Privately Held Knowledge
Ex Post Efficiency Access
Agency Problems Sponsors
Ex Ante Efficiency (v-c)
(Politics)
v
v
v
v
?
v
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Grants
Grants
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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)
v

?
?
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?
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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)
v
v
?
?
?
?
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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)
v
v
?
v
?
?
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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)
v
v
?
v
?
v
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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)
v
v
?
v
v
v
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Adding Patents
Why you might want patents after all Sponsor
cant judge value Taking advantage of rich
nation revenues Politics But Crowding
out. Making claims on sponsors future budget