Working Paper: NBER ID: w27093
Authors: David Dranove; Craig Garthwaite; Manuel I. Hermosilla
Abstract: Innovation policy involves trading off monopoly output and pricing in the short run in exchange for incentives for firms to develop new products in the future. While existing research demonstrates that expected profits fuel R&D investments, little is known about the novelty of the projects funded by these investments. Relying on data that describe the scientific approaches used by a large sample of experimental drug projects, we expand on this literature by examining the scientific novelty of pharmaceutical R&D investments following the creation of the Medicare Part D program. We find little evidence that the positive demand shock implied by this program prompted firms to undertake scientifically novel R&D activity, as measured by whether the specific scientific approach had been used before. However, we find some evidence that firms invested in products involving novel combinations of scientific approaches. These estimates can inform economists and policymakers assessing the tradeoffs associated with marginal changes in commercial returns from newly developed pharmaceutical products.
Keywords: Pharmaceutical R&D; Medicare Part D; Scientific Novelty
JEL Codes: I10; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Medicare Part D (H51) | clinical trial activity (C90) |
| Medicare Part D (H51) | clinical trials for less novel drugs (C90) |
| Medicare Part D (H51) | clinical trials for more novel drugs (C90) |
| clinical trial activity (C90) | R&D activity (O32) |
| Medicare Part D (H51) | investment in established scientific approaches (C90) |