Stephen E. Chick
Professor of Technology and Operations Management
Associate Professor of Technology and Operations Management
Mechanism Design; Principal-Agent Modeling; Adverse Selection; Moral Hazard; Epidemiology; Influenza Vaccine Supply Chain; HMI; Business Science;
The authors 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. The authors theoretically derive the optimal menu of output-based contracts. Next, the authors 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, the authors 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.