Working Paper: NBER ID: w14567
Authors: Vincenzo Atella; Jay Bhattacharya; Lorenzo Carbonari
Abstract: This paper examines the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: minimum efficacy standards (MES) and a mix of minimum efficacy standards and price control mechanisms (MES+PC). Through a simple model of adverse selection we model the interaction between firms, heterogeneous buyers and the regulator. The theoretical analysis provides two results. First, an MES regime provides greater incentives to produce high quality drugs. Second, an MES+PC mix reduces the difference in price between the highest and lowest quality drugs on the market. The empirical analysis based on US and Italian data corroborates these results.
Keywords: pharmaceutical industry; drug quality; regulation; minimum efficacy standards; price control
JEL Codes: I11; L51; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Minimum Efficacy Standards (MES) (C30) | higher average drug quality (L15) |
| MESP (E69) | reduces price difference between high-quality and low-quality drugs (L15) |
| Price Controls (MESP) (E64) | dampens incentives for quality differentiation (L15) |
| Minimum Efficacy Standards (MES) (C30) | higher quality drug production (L65) |
| Regulatory mix (L59) | influences efficacy delivered to different buyer types (D91) |