EconPol Europe: Optimize Covid-19 Vaccine Production with Time-Based Incentives

A new policy brief from EconPol Europe analyses current vaccine production contracts and recommends an optimal contract design to boost availability. The policy implications, say authors, are very clear: contracts should contain incentives for accelerated production, with vaccines delivered early commanding a higher price.

“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,” says the report’s co-author Daniel Gros (EconPol Europe, CEPS).

“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.”

The analysis starts from the premise of the cost to society caused by delays in the availability of vaccines. A dose delivered one quarter later is substantially less valuable than a dose delivered today. The costs per unit of time remain high as the pandemic continues and governments are forced to implement lockdowns that depress the economy.

However, the resulting urgency to speed up delivery is not recognized in the existing contracts, which specify mostly only a fixed quantity and an overall time frame, typically the entire year of 2021. In the absence of incentives to produce early, firms will tend to minimize adjustment costs, namely the costs resulting from speeding up production. It follows that it is preferable for firms to increase production capacity only gradually.

“Our analysis shows that the lack of incentives to produce early does not derive from a potentially low level of the price offered to companies but on its time path,” explains Gros. “With the existing, fixed price contracts, a dose delivered the subsequent quarter yields the same revenue for the producer as a dose delivered today, but for society there is a huge difference. The practical problem is then how to provide incentives for early delivery.

“A better contract would have the price fully variable over time. In our policy brief, we 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. In this case linearly decreasing price schedules replicate the social optimum.

“Such an optimal contract aligns the time paths of the price with that of the social value of a vaccination.”