Schelling and Aumann Nobel Prize for Economics

October 10, 2005

It was announced today that Thomas C. Schelling and Robert J. Aumann were awarded the Nobel Prize for Economics today. You are probably wondering what this has got to do with vaccines?One of Schelling's most important ideas is the value of precommitment. He has written about how you can be better off, either individually, or institutionally, if your choices are limited in advance. This is a key idea in monetary policy (many governments seek to tie the hands of their central banks), the theory of bargaining, and industrial organization (firms may invest in capacity to precommit a market position and deter rivals). In vaccines, this idea has two important directly relevant implications. First, vaccine production is characterised by high fixed costs (R&D, rgulation, plant) and low margiinal costs. To invest in large scale plants, firms need to be confident that they can sell what they produce at a price high enough to cover not only their marginal costs, but also their sunk fixed costs. The IFFIm is a mechanism which allows donors to enter into long term contracts with vaccine suppliers. In a soon-to-be published analysis, Ethan Yeh and I have shown how this precommitment can greatly increase the value for money for the purchaser and make the producer better off than a scenario in which precommitment is not possible.Second, donors can precommit to buy new vaccines - for example, for malaria or HIV - and so stimulate more R&D by the private sector than if they wait until the vaccine is developed. This increased certainty will stimulate more R&D, and so result in a vaccine more quickly. That insight lies at the heart of the proposed Advance Market Commitments.


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