Ezra Klein and Derek Thompson’s recently published book, Abundance, has sparked a nationwide conversation about the ability of the U.S. government to deliver effective services and promote growth and innovation. While chapters on housing and energy use have generated debate about the appropriate role of regulation and spending, much less discussed is a section nestled near the end of the book about the use of pull funding – a.k.a. tools where the funder pays for output and outcomes, not inputs (e.g. prizes, not grants) – to accelerate the pace of socially valuable innovation. They envision a world where the government announces a goal (e.g. cheap carbon removal, or a vaccine for a neglected tropical disease) and legally commits to paying a fixed amount for any solution that actually works.
As Klein and Thompson write (192),
“Pull funding is efficient because it only pays out if the technology pans out. It’s effective, because it solves a common bottleneck in new technology: demand uncertainty. Some companies are rightly concerned that consumers cannot afford the early, expensive versions of a product. These companies need more certainty about future profits to invest in the final stages of invention.”
They give the example of the $1.5 billion advance market commitment for pneumococcal vaccine, which Market Shaping Accelerator faculty directors Rachel Glennerster, Michael Kremer and Christopher Snyder helped originate and design. The problem outlined is firms would be reluctant to invest in sufficient capacity to accelerate the rollout of a vaccine which tackled strains common in poor countries given that they would be unlikely to command prices that justify incurring such costs. The AMC addressed this problem by committing, in advance, to offer per unit top-up payments matching vaccine purchases. This commitment was followed by the approval of three vaccines and faster rollout of the life-saving vaccine than would have likely happened otherwise. The three vaccines are estimated to have saved over 700,000 lives.
Klein and Thompson accurately identify that private companies are well-situated to tackle many of the world’s thorniest problems, but will not invest without demand for their products. By guaranteeing demand, pull mechanisms attract a range of innovators to the world’s most pressing challenges. Indeed, pull funding recognizes both the strengths and limitations of government intervention: marshaling the state’s great resources without needing to identify the specific firms and approaches to solve the problem. The rest of the book lists many of the pitfalls with traditional government innovation funding–overly risk-averse, saddled with burdensome paperwork requirements, etc. Pull funding sidesteps these concerns: new, risky approaches can compete with established approaches. Would-be innovators do not need to have an established contracting relationship with the government. They do not need to know how to navigate the byzantine grantmaking apparatus. All that matters is that the product actually works.
Advance Market Commitments, in particular, also reconcile the tension between incentivizing innovation and ensuring affordable access (an issue that was touched on in Tyler Cowen’s recent conversation with Ezra Klein). Through an AMC, funders can condition a subsidy on selling a large quantity at an affordable price. As a result, firms are not incentivized to reduce quantity and raise prices (AMCs get firms out of the “monopoly pricing problem”). The subsidy rewards innovation while the price cap ensures affordable access, making them an ideal tool for the abundance agenda.
Market shaping for climate change
Abundance highlights one potential application of advance market commitments (an instantiation of pull funding where the government legally commits to a per-unit subsidy for a novel good): clean cement. Klein and Thompson write (195),
If the US pledged to buy several billions of dollars’ worth of affordable green cement, it could encourage investors and entrepreneurs to pour more time and treasure into its development. The up-front funds could help green cement companies expand their production facilities. As Wright’s law [which says that increasing production lowers costs as firms learn out how to improve their processes] works its magic, the cost of producing green cement would decline over time. The result would optimistically be a win-win-win-win: the start-ups would get funding, the public would get cleaner infrastructure, the treasury would protect taxpayers by only paying for success, and the climate would get a reprieve from carbon-coughing cement.
One of the biggest advantages of using pull funding, Klein and Thompson write, is that the bounty of potential means to decarbonize cement, from carbon capture technologies to replacing limestone as a principal input. Instead of the government picking which approaches they like best, pull funding lets the market decide, at the market’s own expense. If a firm thinks everyone else is overlooking a promising angle, they can risk their own capital and invest. If they turn out to be right, the pull funding mechanism will reward them handsomely. If not, they lose their money. This firm-agnostic, technology-agnostic approach lets firms take advantage of their own private information and private conviction, without needing to jump through a labyrinthine approval process from the government that punishes novelty and risk-taking. But pull funding protects against non-serious efforts by offering no money to firms that fail. This approach is well-situated for applications, like green cement, where the suite of possible paths is so broad.
The Market Shaping Accelerator has explored the use of AMCs for green cement in the past. By guaranteeing demand conditional on success, pull funding incentivizes firms to find creative, low-cost solutions to the problem of carbon-intensive cement production. The thorniest problem is how to define success in a world where green cement is already possible, just far too expensive to be cost-competitive with ordinary cement. The first few iterations of any novel product will always be pricey, so one needs to determine which approaches are expensive-but-promising and which approaches are expensive-and-will-remain-so. Creative market shaping approaches, such as committing to only continue buying conditional on continually declining prices, might be necessary to achieve success.
Pull funding is an idea whose time has come
Abundance is a welcome addition to the national discourse of how to improve government institutions to further accelerate progress. Innovation can help tackle many of the most challenging problems the world faces–from improving public health to cleaning up the environment–but without demand, would-be innovators will set their sights elsewhere. As Klein and Thompson emphasize repeatedly throughout the book, existing tools to promote science are hamstrung by poor incentives and burdensome requirements that direct researcher time towards grant-writing and incremental, low-risk iterations on existing work. Expanding the use of pull funding tools, which pay only based on success, could be a valuable improvement that takes advantage of both the public sector’s capacity for collective action at scale with the dynamism and flexibility of private firms. We are glad to see more scholars and thinkers join us in our excitement about the use of these funding mechanisms.
