The Los Angeles Homeless Services Authority receives roughly $1 billion per year to alleviate homelessness but regularly fails to meet targets for success. A cycle ensues: the homeless in L.A. suffer from rampant crime, disease, and overdoses; journalists cover these failures; activists demand more money for failed programs; and little winds up changing, beyond rising budget outlays. And this cycle isn’t exclusive to homeless services. The same problem exists across government, as well as in the nonprofit sector.
Could the solution to reining in such wasteful government and nonprofit spending be a commitment to buy only goods and services proven to work? This may sound simplistic, but the idea, called advanced market commitments (AMC), has won influential adherents across academia, governments, and nonprofits.
AMCs are a mechanism whereby a funder, normally a government, promises to buy only a specified quantity of a good or service that meets predetermined criteria. AMCs’ design is meant to reduce risk for both producers and funders. Funders are obligated to purchase only a product that works; producers know that if they create a genuinely valuable product, a market will exist to sell it. AMCs are a relatively market-friendly approach to government funding of products and innovations. While the funder decides what type of product is needed, any firm, conglomerate of firms, start-up, or academic research team can compete to provide it.
Some obstacles exist. Producers might be hesitant to create a socially valuable product, for example, if the potential customers can’t pay enough to make it profitable, or if the number of customers is too unpredictable to make the risk worthwhile. In response to these objections, an early application of AMCs has focused on encouraging provision of medical products that will be most valuable in low-income countries. The advance market commitment for pneumococcal vaccines, for example, aims to encourage pharmaceutical companies to develop a vaccine against pneumococcal disease, which kills hundreds of thousands of children annually, by guaranteeing vaccine makers that they will be able to sell such a vaccine at a reasonably high price, even though most of its users will be relatively poor.
President Donald Trump’s Operation Warp Speed shared some AMC characteristics. His administration agreed to purchase large quantities of Covid-19 vaccines in advance, reducing risks for manufacturers and dramatically accelerating production. Operation Warp Speed differed from classic AMC design in that it lacked an explicit agreement of what efficacy thresholds had to be met before purchase, and by agreeing to purchase vaccines in advance from specific producers, rather than waiting to commit until a company could demonstrate that its product fulfilled prespecified criteria.
Despite their name, AMCs are primarily a government or philanthropic funding mechanism. They’re not a “free market” mechanism, wherein price signals and revealed preferences drive producer behavior. Thus, they depend on high-quality experts and administrators who can secure sufficient funding to attract producers and draw up the AMC in sufficient detail to encourage genuinely valuable innovation. These administrators will draft a “target product profile” that describes what characteristics a product needs and how its effectiveness and safety will be measured and tested; they will also determine a pricing agreement (the quantity and price that the funder promises to accept).
If the administrators don’t do this effectively, they might create AMCs that set goals too modestly and wind up paying for a product that is either low-value or could have been created without any government funding. If the administrators are too ambitious, on the other hand, they risk setting aside funds for impossible targets—elixir of immortality, anyone?—that don’t succeed in spurring innovation. And if the administrators turn to outside experts or lobbyists for help in drafting AMCs, the result might be suspiciously specific requirements that benefit politically connected manufacturers—say, a pharmaceutical AMC that just so happens to align perfectly with a promising new Pfizer product.
AMCs are not without their dangers, then, but the risks appear to be lower than those of continuing the status quo in government contracting or subsidies. The structure of AMCs can protect against wasting money on products that do not deliver, and the transparency of their design and product specifications can protect against corruption.
In theory, AMCs could be used to motivate an unlimited scope of goods or services. But they are best suited for creating value in situations where organic markets seem unlikely either to demand a product or to demand it in sufficient quantities to make it profitable. AMCs also seem especially promising in cases where funders want to create a product but face public skepticism about its utility or safety. Consider vaccines: AMCs could simultaneously encourage the development of new vaccines, while also reassuring the public that government will buy only products that meet clearly specified safety and efficacy criteria. The Biden White House’s Office of Science and Technology Policy estimates that, for $24 billion, the United States could produce prototype vaccines against all the viral families that cause human disease. An AMC along these lines would help encourage the development of new antiviral measures without the risk of paying for failed efforts or doling out pointless subsidies to Big Pharma.
Another promising target for AMCs might be the development of a universal coronavirus vaccine to protect against future variants. A recent report that I coauthored with Rachel Glennerster of the University of Chicago and Chris Snyder of Dartmouth argues that a vaccine capable of protecting against all Covid variants would be conservatively valued at more than half a trillion dollars. But an AMC aimed at this goal would only cost money if it worked, and only if it met clearly defined safety criteria.
Surely, this is a bet worth taking.