Increasing the supply of health products in underserved regions

We study mechanisms that encourage manufacturers of health products to build production and distribution capacity. This is important for low- and middle-income country (LMIC) markets where ability to pay is lower and demand risks are greater. Development finance institutions and philanthropies are beginning to utilize new instruments to incentivize manufacturers to build production/distribution capacity for LMIC markets. The goal of this paper is to understand the effectiveness of such mechanisms in different settings. We examine four instruments: (1) subsidy proportional to unit sales (sales subsidy), (2) subsidy proportional to unit capacity (variable-capacity subsidy), (3) subsidy proportional to total capacity investment (total-capacity subsidy), and (4) a minimum volume guarantee. We analyze incentivized capacity as a function of the social-investor budget for each instrument. We show how our framework can be used to identify a social investor's preferred instrument given relevant parameter estimates, and we provide insight into the type of settings where a particular instrument dominates. A sales subsidy dominates when ability to pay is very low; a total-capacity subsidy dominates when ability to pay is low. Outside of these settings, instrument preference is nuanced, though a sales subsidy is dominated by at least one other instrument. When ability to pay is moderate, a variable-capacity subsidy tends to be preferred under high variable-capacity cost and high budget, a volume guarantee tends to be preferred under low variable-capacity cost and high budget, and a total-capacity subsidy tends to be preferred under low budget.