We just published an interview: Rachel Glennerster on how “market shaping” could help solve climate change, pandemics, and other global problems. Listen on Spotify or click through for other audio options, the transcript, and related links. Below are the episode summary and some key excerpts.
Episode summary
You can’t charge what something is worth during a pandemic. So we estimated that the value of one course of COVID vaccine in January 2021 was over $5,000. They were selling for between $6 and $40. So nothing like their social value.
Now, don’t get me wrong. I don’t think that they should have charged $5,000 or $6,000. That’s not ethical. It’s also not economically efficient, because they didn’t cost $5,000 at the marginal cost. So you actually want low price, getting out to lots of people.
But it shows you that the market is not going to reward people who do the investment in preparation for a pandemic — because when a pandemic hits, they’re not going to get the reward in line with the social value. They may even have to charge less than they would in a non-pandemic time. So prepping for a pandemic is not an efficient market strategy if I’m a firm, but it’s a very efficient strategy for society, and so we’ve got to bridge that gap.
- Rachel Glennerster
In today’s episode, host Luisa Rodriguez speaks to Rachel Glennerster — associate professor of economics at the University of Chicago and a pioneer in the field of development economics — about how her team’s new Market Shaping Accelerator aims to leverage market forces to drive innovations that can solve pressing world problems.
They cover:
- How market failures and misaligned incentives stifle critical innovations for social goods like pandemic preparedness, climate change interventions, and vaccine development.
- How “pull mechanisms” like advance market commitments (AMCs) can help overcome these challenges — including concrete examples like how one AMC led to speeding up the development of three vaccines which saved around 700,000 lives in low-income countries.
- The challenges in designing effective pull mechanisms, from design to implementation.
- Why it’s important to tie innovation incentives to real-world impact and uptake, not just the invention of a new technology.
- The massive benefits of accelerating vaccine development, in some cases, even if it’s only by a few days or weeks.
- The case for a $6 billion advance market commitment to spur work on a universal COVID-19 vaccine.
- The shortlist of ideas from the Market Shaping Accelerator’s recent Innovation Challenge that use pull mechanisms to address market failures around improving indoor air quality, repurposing generic drugs for alternative uses, and developing eco-friendly air conditioners for a warming planet.
- “Best Buys” and “Bad Buys” for improving education systems in low- and middle-income countries, based on evidence from over 400 studies.
- Lessons from Rachel’s career at the forefront of global development, and how insights from economics can drive transformative change.
- And much more.
Producer and editor: Keiran Harris
Audio Engineering Lead: Ben Cordell
Technical editing: Simon Monsour, Milo McGuire, and Dominic Armstrong
Additional content editing: Katy Moore and Luisa Rodriguez
Transcriptions: Katy Moore
Highlights
What is market shaping?
Rachel Glennerster: Market shaping is the idea of leveraging the power of markets to incentivise innovators to generate the innovations we need to solve some of the world’s biggest problems. Now, markets have a lot of benefits: they help incentivise innovation, they develop products that people actually want to use, they aggregate information. But they also get things wrong. They’re not very good at solving things where there are externalities, like climate change. So the idea is to get the best of both worlds, and incentivise markets to respond to the things where we really need them to respond to.
Luisa Rodriguez: Learning about this accelerator actually made me think of this blog post that a friend shared with me recently. The blog post was by Jacob Trefethen, and it’s called “10 technologies that won’t exist in five years.” So Jacob’s the science policy grantmaker at Open Philanthropy, so he has kind of a sense of where science funding goes, and how hard it is to make progress in some areas.
And I found the blog post really moving and really tragic, and it feels relevant, so I wanted to share a couple of the technologies that he thinks won’t exist. One relates to tuberculosis, which kills 1.5 million people a year, which is twice as many people as die of malaria each year. And according to Jacob, a tuberculosis vaccine that worked in adults is totally achievable. But he thinks, for basically no good reasons, we won’t have one in five years. Like, nothing related to the science will prevent us from getting there. Similarly, strep A kills 500,000 people a year, and again, a vaccine is achievable. Hepatitis C kills 300,000 people a year — again, a vaccine is achievable.
And yeah, it’s really horrible. I definitely had the intuition that diseases like this, that are this deadly, we’re not creating the vaccines or treatments we need because the science is too hard. But when I learn that’s not the case, it just feels really unacceptable.
Rachel Glennerster: Yeah, those are exactly the kinds of targets we need to do market shaping for. Actually, tuberculosis was one of the diseases that brought me into thinking about this many, many years ago, when I first started working on trying to accelerate vaccines. And it took way too long for us to get a malaria vaccine compared to the huge death toll.
There’s a number of market failures going on. There’s a number of reasons people don’t invest in doing innovations for these kinds of problems. One of them is that there’s a lot of pressure to keep prices down once you invent something, especially if it’s really important for poor people. So it’s a time-inconsistency problem, we call it: you would be willing to pay for something in advance, but once it comes, there’s a big pressure to keep prices down.
And the patent system that we have to incentivise people for innovation is really, really inefficient. It works by allowing companies to keep prices high, to get a reward and a return on their investment. But if you’re designing something for really poor people, nobody’s going to buy it when the price is high. So you have a small quantity at a high price, and you make your money back, and then later you reduce your price and get it to lots of people. So it doesn’t work very well for diseases that affect a lot of… Or a vaccine: people are willing to pay a lot to get a drug that you’re about to die of a disease. But a vaccine, you need a low price to get to lots of people. That’s not how our patent system is designed to work. It works by charging a high price to a small number of people. And that’s just really inefficient.
Why some countries didn't have COVID vaccines sooner
Rachel Glennerster: So in March we were saying, “Build factories, get this manufacturing scaled up. We have no idea if this vaccine is going to work. It doesn’t matter.” We had a very low percentage rate for the vaccines working. It was still worth putting billions of dollars into accelerating manufacturing. If I’m a firm, I’m not going to put billions of dollars into expanding manufacturing capacity until I know whether the vaccine works. Because I’m only going to get $6 on it — $6 was the AstraZeneca; $40 was the Pfizer type. So it’s not worth risking putting billions of dollars in building a manufacturing plant if the vaccine might not work.
But that’s exactly what the US and the UK did. They poured money into expanding factories and producing the stuff so that as soon as it was approved, they had vaccine ready to go. And that’s why… Sorry, I’m going to get emotional. That’s why my parents could get a vaccine in January 2021. And other people couldn’t. It’s because of that investment. And if only we’d managed to persuade more people to do this, I think of the lives that could have been saved.
Luisa Rodriguez: What do you think it would have looked like to really have nailed that from a funding perspective, to actually get things out as quickly as we could have?
Rachel Glennerster: Oh, so many things we could have done differently. So many things. One of the things that we really wanted middle-income countries to do was to put money into expanding their capacity before we knew whether they were going to work — and multilateral development banks wouldn’t lend to them until they knew whether the vaccine would work.
The international mechanisms for buying the vaccines for low- and middle-income countries didn’t buy them until they knew whether they worked. And we spent months arguing about how to fund these vaccines. Initially, people were arguing that no low- and middle-income countries should pay for them; it should all be donor money. We’re just not going to get enough donor grant money to get it out to enough people. So they traded off waiting for donor money and saying nobody should ever have to borrow to fund vaccines.
Well, that’s crazy. If they’d been able to borrow and get more vaccines faster, they would have saved billions, trillions of dollars. And so absolutely, it was an economic return to Brazil and other places, but they thought the rich countries are going to pay for it, so we’ll just wait. Well, that was a really bad miscalculation. And holding out the prospect that rich countries were going to just pay for that when they were coping with their economies collapsing, it just wasn’t realistic.
I mean, even the EU was arguing over exactly what price, and trying to drive the price down. It made no sense. Like, get the money out there. Don’t argue whether you’re getting it for $40 or $45 — it’s worth $5,000! Don’t nickel and dime. And the hours you spent negotiating, a lot of people are dying. It just didn’t make any sense.
Designing incentives for pull mechanisms
Rachel Glennerster: Yeah. Coming up with the right amount of incentive is, I think, one of the toughest challenges in designing these pull mechanisms. And the way you tackle it is from the top down or the bottom up.
So one thing you do is you say: how valuable is this to society? That’s the maximum that you should be willing to pay. And of that, how much will the private public be willing to pay? And how much is the externality? How much is the market failure? So the subsidy needs to be linked to how much the market failure is. That’s kind of the top down: what’s the social value of this innovation?
Luisa Rodriguez: Right: what should we be willing to pay?
Rachel Glennerster: What should we be willing to pay, exactly. And then, from the bottom up, you think about the costs. Because you don’t want to reward people the full social value if it costs them only a hundredth of that to come up with it; you’d like to use that money to stimulate some other innovation.
So then you look at the costs, what you think are the costs, and how much do we think it would cost to innovate? Or how big an incentive does the private sector normally need to come up with this kind of innovation? We can use that a lot in drugs and vaccines, like: how big a market stimulates the pharmaceutical industry to come up with these kinds of breakthroughs? We look at the chance of failure: how often do companies put a lot of money in and then fail?
And there’s normally a huge gap between those, with the costs at one level, and the social benefit is way, way, way higher. You don’t want to put the incentive exactly where the minimum cost is because you might have got it wrong, you might end up with no vaccine or no climate solution. And that’s really damaging to the world if you put the price too low. So you probably want to put it a bit above that, but exactly how much above it? Again, you can start getting empirical about that. You can say, what’s the chance that we underestimated, and what would be the social loss if we underestimated?
It’s basically a lot of kind of simulations of different scenarios, and then a certain amount of judgement, and an assessment of what we think donors are willing to pay for and what’s realistic. It’s a really interesting mix of quite a lot of technical number crunching, on the benefits side and on the cost side, and some political judgement and understanding in a sense the political market of who might be willing to pay for this. It brings together all the things I love about my work, which is some interesting economics and some tough number crunching and some political judgement.
Luisa Rodriguez: Well that’s great, because I was just thinking, “Wow, that sounds really hard. I don’t know who’s going to design these” — but it sounds like you and your colleagues are excited to design them. It does sound really difficult to get these right. The idea sounds really compelling, and then as soon as you start talking about how difficult it is to even just pick a number… In my head, I hadn’t even considered that. It really makes more salient to me what a different challenge this is to push funding, where you’re just kind of evaluating grant applications where someone said what their budget is.
Rachel Glennerster: Right. But we might be giving up huge benefits to the world if we don’t do this. So yeah, it’s hard, but the reward is incredible if we get this right.
Using pull mechanisms to get a universal COVID vaccine
Rachel Glennerster: So you make those assumptions and then you run these Monte Carlo simulations with the probabilities of things hitting. And then you look at the deaths that would happen if a bad wave hit and we were late in getting a vaccine out that helped. And that’s how you come up with the calculations. I should say that those numbers I gave you are just for the US. So the $1.5–2.6 trillion benefit is for the US.
Luisa Rodriguez: Wow, that’s really mind blowing.
Rachel Glennerster: I mean, I think this is the thing: we lose so much money from curbing the economy when these pandemics hit, when even kind of moderate things hit, when people die from waves — which they are still doing. And just putting numbers on these things is really important. I think probably one of the most important things I’ve done in my life is just put numbers on the value of vaccines during COVID, to just make it real and understandable how much it is worth investing in these things.
Luisa Rodriguez: That makes sense, and does seem like an incredibly good buy. I guess we haven’t yet talked about how much the AMC would cost, but I’m guessing it is not on the order of trillions of dollars. How much would it cost?
Rachel Glennerster: So we know how much benefit there is to the world of getting this. Then we say it would be worth, therefore, the US doing an advance market commitment to cover everyone in the US who wanted to receive it — roughly half the US population. So that’s 165 million people, so the AMC would require something like $6.4 billion.
We think it would be reasonable to spend $6.4 billion on an AMC. That would be an incredible deal, versus $1.5 trillion in losses, or 1.5 trillion in benefits from having it. I don’t know exactly what it’s going to cost a firm to produce this, but we talked before about how do you set the price: the top-down, the bottom-up approach. And our estimate is we should be willing to pay $6.4 billion in order to get the benefit of at least $1.4 trillion.
Luisa Rodriguez: Cool. Why use an advance market commitment in this case, rather than just funding groups doing promising work? Because you’ve already said there are firms working on a universal COVID-19 vaccine. If we know anything about which firms seem to be doing the most promising work, should we just give them money to do that?
Rachel Glennerster: So what there are are research groups working on this. What we need is big firms coming in and thinking that it’s going to be profitable to work on this. Because it’s one thing having research groups coming in, but you need a significant market out there for the big guys to come in, who know how to run trials, who put the work into making these things effective at scale. That’s what we’re missing at the moment.
Just remember, the main issue is not, “Is anyone working on it?” There may be some firms who are working on it, but there’s not sufficient attention to it, given the benefits. And the more work you put on it, the faster it will come, and the more likely it is to come. So you don’t have to have this hard cutoff of it wouldn’t happen without this. It’s: is there a probability that that will increase the chance of it happening? And what’s the probability that it will speed it up? And I think we can be pretty confident it would speed it up and increase the probability of it being actually produced.
And we see this too often, that research groups will be able to take things to a certain point, but you need the really big guys in there to kind of pull it into effective-at-scale, gone through clinical trials, et cetera — and they will come in earlier and they will push it harder if there’s a bigger market for it. Of that, I’m pretty confident.
Pull mechanisms to incentivise repurposing of generic drugs
Rachel Glennerster: So there are a lot of drugs which are approved for one purpose, one disease, and end up actually being quite effective for another disease. We actually saw this during COVID. There was a fantastic trial in the UK where they just tried a lot of existing low-cost, off-patent drugs and to see whether they worked, and some of them did. The problem is firms don’t have the incentive to spend millions of dollars testing a drug that’s already off-patent to see if it works on another disease.
Luisa Rodriguez: Just to make sure I understand, is this kind of like the fact that people take aspirin for various specific reasons, but it also seems to reduce some types of heart disease? And so there are just things like that in other places, and we could learn about them, but we don’t really, because it’s not that profitable to sell generic drugs?
Rachel Glennerster: Yeah, it’s exactly that. And it’s profitable to sell them if you’re not doing any R&D, but if you do a big clinical trial, you’re not going to get the returns to that, because all your competitors can sell it for the other disease too. So you can’t make any money from it.
So the key thing that we want to generate with the pull mechanism is firms to think about all the millions of drugs out there. If you’re sitting in the centre, you can’t really tell what possible drugs are there that could be repurposed for what possible disease. So what you want to say is, we’ll pay a higher price for anything that you come up with that is cost effective. That is decentralising the search process. So I’m not in the centre saying that I think this drug could be repurposed for that; I’m just saying, “If anyone out there has a really good idea for a particular drug that could be repurposed for something else, we want to give an incentive for all of that.”
A key thing about pull is that it harnesses the information of all millions of people out there who might have ideas that you don’t know anything about. So that’s why we need pull here, because there’s millions of drugs, there’s millions of different uses, we don’t know what they are. We need to create an incentive for people to come forward with ideas.
So I think there’s two different ways that you could do a pull mechanism for repurposing drugs, and they solve different problems. One is in high-income countries and one is in low-income countries.
So in high-income countries, you can tie the reward to whether people use the new repurposed drug for its new purpose. So you can say, if you test and find that an existing drug works for a new disease, and people use it for that new disease, we’ll pay you based on how many people use it for the new disease. And that works in high-income countries, where you’ve got some kind of centralised purchasing or centralised pricing for drugs. In the UK, there’s a pharmaceutical price regulation system, which sets prices for all drugs. So you can say, “This is the price that we’re going to repay you, if you use the drug for this purpose” — and it’s all tracked, and we know why doctors are using it, so we can tell whether doctors are using it for the new purpose or the old purpose.
In a low-income context, we don’t have those kind of centralised data systems to know whether someone is using that drug for the old reason or the new reason. But there’s a lot of things where probably repurposed drugs might really help in low-income countries. So then I think the best thing to do is a prize, where you just pay someone, but you pay someone if it works, right? You tie it to an outcome. So you say, “We will give you money if you manage to show that this generic drug that’s super cheap actually works for some other reason, and you get regulatory approval for it” — and then you get a prize for having done all of that work.
Luisa Rodriguez: So it seems plausible that focusing on specific interventions is meaningfully worse than encouraging governments to make systemic reforms to their education systems. Is that something that you worry about?
Rachel Glennerster: It’s certainly the case that there are big-picture systemic issues that cause problems in education. It’s a big deal. So we were talking about the benefits of teaching at the right level, and the fact that curricula is sometimes very overly ambitious. That’s a problem, and it’d be great if people fix that problem. There’s a lot of RCT evidence that basically individual programmes that help you get around that fact, like Teaching at the Right Level, are really beneficial.
And you might think the right thing to do is, let’s go fix the underlying problem. I’m all for that, but it’s hard, and there’s all sorts of political economy reasons why things are designed for the top of the class. So if you can do that, great. If you can get an education system to respond to the needs of low-income children — that’s more flexible, that’s evidence-based — great on you.
But I’m not going to wait for that to do the other things. Because let’s be clear: every single thing that we’re recommending here has been tested in isolation and worked in isolation. So it is not the case, it’s empirically not the case that you need systems reform to do these things. They have been tested and they have proved to work when they were the only thing that was done. Because a lot of these come from RCTs. Not all of them, but a lot of them do. And that’s what RCTs do: they just move one thing, they don’t move everything else.
So systems change is important. Having systems that actually care about low-income kids is really important. But you can’t just magic that, you can’t put in that as a recommendation: “Care about low-income kids.” And there’s a political economy of that. It is true that there’s probably some benefits of doing a bunch of things. There may be benefits of doing some things together. If you had better tech… Like the structured pedagogy is an example of that: they actually tie together a whole bunch of things that move together. But don’t wait until you have it perfect. Get on with doing the things that you can do.
