Working Paper: NBER ID: w12080
Authors: Alan M. Garber; Charles I. Jones; Paul M. Romer
Abstract: This paper studies the interactions between health insurance and the incentives for innovation. Although we focus on pharmaceutical innovation, our discussion applies to other industries producing novel technologies for sale in markets with subsidized demand. Standard results in the growth and productivity literatures suggest that firms in many industries may possess inadequate incentives to innovate. Standard results in the health literature suggest that health insurance leads to the overutilization of health care. Our study of innovation in the pharmaceutical industry emphasizes the interaction of these incentives. Because of the large subsidies to demand from health insurance, limits on the lifetime of patents and possibly limits on monopoly pricing may be necessary to ensure that pharmaceutical companies do not possess excess incentives for innovation.
Keywords: health insurance; pharmaceutical innovation; moral hazard; static efficiency; dynamic efficiency
JEL Codes: I1; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| health insurance (I13) | moral hazard (G52) |
| moral hazard (G52) | overutilization of pharmaceuticals (L65) |
| coinsurance rates (G52) | drug utilization (H51) |
| profits of pharmaceutical companies (L65) | consumer surplus (D46) |
| low coinsurance rates (G52) | excessive consumption (E21) |
| low coinsurance rates + regulation on patent duration (D45) | alignment of innovation incentives with social welfare (O35) |
| static efficiency (H21) | dynamic efficiency (C69) |