[[{“value”:”In May 2020, I wrote a post titled Every Stock is a Vaccine Stock highlighting that the stock market reaction to good vaccine news indicated that vaccines were worth trillions and that most of this value was external to the vaccine manufacturers, meaning that the vaccine manufacturers were under-incentivized. It’s not surprising that when Moderna
The post Every Stock is a Vaccine Stock, Revisited appeared first on Marginal REVOLUTION.”}]]
In May 2020, I wrote a post titled Every Stock is a Vaccine Stock highlighting that the stock market reaction to good vaccine news indicated that vaccines were worth trillions and that most of this value was external to the vaccine manufacturers, meaning that the vaccine manufacturers were under-incentivized.
It’s not surprising that when Moderna reports good vaccine results, Moderna does well. It’s more surprising that Boeing and GE not only do well they increase in value far more than Moderna. On May 18, for example, when Moderna announced very preliminary positive results on its vaccine it’s market capitalization rose by $5b. But GE’s market capitalization rose by $6.82 billion and Boeing increased in value by $8.73 billion.
A cure for COVID-19 would be worth trillions to the world but only billions to the creator. The stock market is illustrating the massive externalities created by innovation. Nordhaus estimated that only 2.2% of the value of innovation was captured by innovators. For vaccine manufacturers it’s probably closer to .2%.
Who can internalize the externalities? Moderna clearly can’t because if they could then on May 18 Moderna would have increased in value by $20.52b ($4.97b+$6.82b+$8.73b) and GE and Boeing wouldn’t have gone up at all. Massive externalities.
A clever institutional investor like Blackrock or Vanguard could internalize some of the externalities by encouraging Moderna to work even faster and invest even more, even to the extent of lowering Moderna’s profits. Blackrock would more than make up for the losses on Moderna by bigger gains on other firms in its portfolio. Blackrock does indeed understand the incentives, although its unclear how much beyond jawboning they can actually do, legally.
I’d like to see more innovation in mechanisms to internalize externalities–perhaps in a pandemic vaccine firms should be given stock options on the S&P 500. Until we develop those innovations, however, the government is the best bet at internalizing the externality by paying vaccine manufacturers to increase capacity and move more quickly than their own incentives would dictate. Billions in costs, trillions in benefits.
A new paper by Acharya, Johnson, Sundaresan and Zheng formulizes this intuition. The authors combine a model of preferences in which uncertainty can be priced with an estimate of the stock market reaction to vaccine news and conclude that “ending the pandemic would have been worth from 5% to 15% of total wealth”.
One measure of the ex ante cost of disasters is the welfare gain from shortening their expected duration. We introduce a stochastic clock into a standard disaster model that summarizes information about progress (positive or negative) toward disaster resolution. We show that the stock market response to duration news is essentially a sufficient statistic to identify the welfare gain to interventions that alter the state. Using information on clinical trial progress during 2020, we build contemporaneous forecasts of the time to vaccine deployment, which provide a measure of the anticipated length of the COVID-19 pandemic. The model can thus be calibrated from market reactions to vaccine news, which we estimate. The estimates imply that ending the pandemic would have been worth from 5% to 15% of total wealth as the expected duration varied in this period.
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Economics, History, Law, Medicine
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