Working Paper: NBER ID: w15603
Authors: Tomas J. Philipson; Eric C. Sun; Dana Goldman
Abstract: In the United States, drugs are jointly regulated by the US Food and Drug Administration, which oversees premarket clinical trials designed to ensure drug safety and efficacy, and the liability system, which allows patients to sue manufacturers for unsafe drugs. In this paper, we examine the potential welfare effects of this dual system aimed at ensuring the safety of medical products, and conclude that product liability exemptions for FDA regulated activities could raise economic efficiency. We show that while reductions in liability, such those associated with pre-emption, may lower welfare in the absence of the FDA, they may raise welfare in its presence. In the presence of the FDA, product liability may reduce efficiency by raising prices without pushing firms, who are already bound by the agency's requirements, to invest further in product safety. We consider as a case study the National Vaccine Injury Compensation Program, which sharply reduced vaccine manufacturer's liability in 1988. We find evidence that the program reduced prices without affecting vaccine safety, suggesting that liability reductions can enhance economic efficiency in the presence of the FDA.
Keywords: Product Liability; FDA Regulation; Economic Efficiency; Vaccines; Public Policy
JEL Codes: I11; I18; K32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product liability exemptions for FDA-regulated activities (K13) | raise economic efficiency (D61) |
| NVICP (I19) | decreased prices (P22) |
| decreased prices (P22) | enhance economic efficiency (D61) |
| product liability acts as a tax (K13) | reduce overconsumption (D18) |
| FDA presence (L65) | alters efficiency effects of product liability (K13) |