Stock market plunge should incentivize firms to develop a coronavirus cure
The $8 billion emergency spending bill to deal with coronavirus includes $3 billion that can be used for the research and development of a coronavirus vaccine or treatment. There’s a better way: The U.S. government should take advantage of the recent stock market plunge to incentivize firms to develop a coronavirus cure, vaccine, or other approaches.
We call this proposal the Epidemic Market Solution or EMS. The government should offer each of 10 firms stock options worth ten billion dollars if the Dow Jones increases by 15 percent over the next six months, and maintains that average increase over a month.
A coronavirus cure or vaccine would generate such an increase. For example, if a firm has $10 billion in options based on index funds, and a new cure or progress towards a cure causes the stock market to rise by 15 percent, the firm would make a profit of $1.5 billion. An even better response might be an increase in the market by 20 percent; in this case, the firm would make a profit of $2 billion.
The EMS turns on its head the secrecy and noncooperation that plagues proprietary research. The faster and better a cure — no matter who develops it — the more the stock market will rebound, and the faster and more lucrative the EMS reward. Each firm should gladly share its innovations with other firms, who could improve on them, provide even better solutions, and so cause a further rise in the stock market. Firms need not wallow in patent litigation in order to profit from new ideas — indeed; the EMS bypasses the patent system entirely.
The EMS promotes collective innovation. It would incentivize firms to spend money and collaborate on developing a coronavirus cure. It would also incentivize the firms to distribute any innovation far and wide and to provide the cure to the public for free, since the greater the number of people who use it, the stronger will be the growth in economic activity and the greater the rise in the stock market.
The EMS builds on the Advanced Market Commitment, which subsidizes the purchase, at a given price, of an as yet unavailable vaccine against a specific disease. That had been proposed by Nobel Prize winner Michael Kremer and co-authors and funded by the Gates Foundation.
But unlike Advanced Market Commitments, the EMS allows firms to decide what avenue to pursue, solutions that no government official might even have thought of. It doesn’t require any bureaucracy to evaluate the vaccine or cure. Perhaps the best option is a vaccine that is not effective enough to qualify for the Advanced Market Commitment but nevertheless improves the health of exposed people. Perhaps the best option is neither a traditional vaccine or cure, but some alternative mechanism (free Purell to everyone?) that reduces transmission of the disease or its consequences for those who become infected. The EMS promotes any solution.
Another related idea is the social impact bond, favored among others by the President of the New York Fed, John Williams. These are essentially future contracts on social outcomes, paying investors who financed a new program only if the program succeeds. They are mostly devised to raise funds, rather than to give the program managers big incentives to perform.
Worried about windfalls to pharmaceutical firms? The stock options could be sold to the highest bidder, thereby generating immediate revenue to the government, and requiring governmental spending only if the economy really improves. Worried about market manipulators taking advantage to cash in without investing in a cure? The advantage of tying the payout to a broad market index is that sustained manipulation is difficult and far more expensive than trying to address the underlying problem of disease.
In 1776 Adam Smith wrote “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”
Big problems require big incentives. The EMS provides them.
Linda Cohen is a professor of Economics and Law at the University of California, Irvine. Amihai Glazer is a professor of economics and director of the Program in Corporate Welfare at the University of California, Irvine. Opinions expressed above belong to the authors and should not be ascribed to the University.