DAO-ISEM-IORA Seminar Series: Peng Sun

BIZ2 0511

Optimal Push, Pull, and Failure Funding for Global Health

Malaria and tuberculosis each cause over half a million deaths annually, yet commercial incentives to develop treatments for these and other diseases concentrated in low-income countries remain weak. Governments and nonprofits address this gap through push (e.g., grants) and pull (e.g., prizes) mechanisms. We propose a third approach: the funder pays only if the firm fails, reimbursing part of its testing costs. This failure insurance is optimal when markets are large enough to reward success but too small to justify initial investment. We model the problem as an infinite-dimensional optimization problem with adverse selection and moral hazard constraints, and use duality theory to characterize optimal funding mechanisms.  Failure insurance is preferred for tuberculosis if testing costs are below \$1 billion. For most tropical diseases, including malaria, the optimal policy is pull funding with supplemental push support. These results challenge current push-heavy practice and offer broader insights for global health and innovation policy.

Peng Sun is a JB Fuqua Professor in the Decision Sciences area at the Fuqua School of Business, Duke University. He researches mathematical theories and models for resource allocation decisions under uncertainty, and incentive issues in dynamic environments. His work spans a range of applications areas, from operations management, economics, finance, marketing, to health care and sustainability. He has served as a Department Editor at Management Science, and an Associate Editor at Operations Research.