Information Elicitation and Influenza Vaccine Production

• Published in: Operations research 2017-01, Vol.65 (1), p.75-96
• Main Authors: Chick, Stephen E., Hasija, Sameer, Nasiry, Javad
• Format: Article
• Language: English
• Subjects: adverse selection; Biological products industry; Contracts; Cost control; Costs; CROSSCUTTING AREAS; Delivery scheduling; Drug prices; epidemiology; Government purchasing; Influenza; influenza vaccine supply chain; Influenza vaccines; mechanism design; moral hazard; Operations research; Pharmaceutical industry; principal-agent modeling; Production management; Productivity; Upper bounds; Vaccines
• ISSN: 0030-364X; 1526-5463
• DOI: 10.1287/opre.2016.1552

We explore the procurement of influenza vaccines by a government whose objective is to minimize the expected social costs (including vaccine, vaccine administration, and influenza treatment costs) when a for-profit vaccine supplier has production yield uncertainty, private information about its productivity (adverse selection), and potentially unverifiable production effort (moral hazard). Timeliness is important—costs for both the supplier and the government procurer may increase if part of the vaccine order is delivered after a scheduled delivery date. We theoretically derive the optimal menu of output-based contracts. Next, we present a menu that is optimal within a more restricted set of practically implementable contracts, and numerically show that such a menu leads to near-optimal outcomes. Finally, we present a novel way to eliminate that information rent if the manufacturer’s effort is also verifiable, a counterintuitive result because the manufacturer has private productivity information. This provides an upper bound for the government on how much it should spend to monitor the manufacturer’s effort.