In May 2020, I wrote a blog titled Every Stock is a Vaccine Stock highlighting that the stock market’s reaction to the good news about vaccines showed that vaccines were worth trillions and that most of this value was outside of vaccine manufacturers, which means that vaccine manufacturers are under-promoted.
Not surprisingly, when Moderna reports positive vaccine results, Moderna does well. It is very surprising that Boeing and GE are not only doing well but rising in value more than Moderna. On May 18, for example, when Moderna announced the first positive results in the vaccine the market capitalization increased by $5b. But GE’s market capitalization increased by $6.82 billion and Boeing’s value increased by $8.73 billion.
The cure for COVID-19 may cost billions to the world but only billions to the creator. The stock market exhibits large externalities created by innovation. Nordhaus estimated that only 2.2% of the value of innovation was captured by inventors. For vaccine manufacturers it is probably closer to .2%.
Who can put outside things inside? Moderna obviously can’t because if they knew then on May 18 Moderna would have increased in value by $20.52b ($4.97b+$6.82b+$8.73b) and GE and Boeing would not have increased at all. Great outdoors.
A smart institutional investor like Blackrock or Vanguard could internalize some of the external factors by encouraging Moderna to operate faster and invest more, even to the point of reducing Moderna’s profits. Blackrock will more than make up for Moderna’s losses with big gains from other firms in its portfolio. Blackrock certainly understands the motivations, although it’s unclear how much more than jawboning they can do, legally.
I’d like to see more innovation in ways to internalize externalities—perhaps pandemic vaccine firms should be given stock options on the S&P 500. Until we develop those new systems, however, the government’s best bet is to externalize by paying. vaccine manufacturers to increase the dose and move faster than their incentives would require. Billions in costs, billions in benefits.
A new paper by Acharya, Johnson, Sundaresan and Zheng develops this concept. The authors put together a model of preferences in which uncertainty can be traded on the stock market reaction rate to vaccine issues and conclude that “ending this epidemic would be worth from 5% to 15% of the total wealth”.
One measure of the upfront costs of disasters is the welfare benefit from shortening their expected duration. We present the stochastic clock as a general crisis model that summarizes information about progress (good or bad) in crisis resolution. We show that the stock market’s response to long-run issues is statistically sufficient to identify a welfare gain from a climate-changing intervention. Using information on clinical trial progress in 2020, we create current forecasts of vaccine use, which provide an estimate of the expected duration of the COVID-19 pandemic. So the model can be measured from the market reaction to the vaccine issues, which we measure. Estimates say that ending the epidemic would be worth from 5% to 15% of the total wealth as the expected time varies in this period.
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