Working Paper: NBER ID: w28964
Authors: Xuelin Li; Andrew W. Lo; Richard T. Thakor
Abstract: This paper explores the relationship between a firm’s legal contracting environment and its innovation incentives. Using granular data from the pharmaceutical industry, we examine a contracting mechanism through which incumbents maintain market power: “pay-for-delay” agreements to delay the market entry of competitors. Exploiting a shock where such contracts become legally tenuous, we find that affected incumbents subsequently increase their innovation activity across a variety of project-level measures. Exploring the nature of this innovation, we also find that it is more “impactful” from a scientific and commercial standpoint. The results provide novel evidence that restricting the contracting space can boost innovation at the firm level. However, at the extensive margin we find a reduction in innovation by new entrants in response to increased competition, suggesting a nuanced effect on aggregate innovation.
Keywords: Market Power; Innovation; Antitrust; Pharmaceutical Industry; Pay-for-Delay Agreements
JEL Codes: D42; D43; G31; K21; L41; L43; L65; O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pay-for-delay agreements (L42) | innovation activities (O31) |
| FTC ruling (L51) | innovation activities (O31) |
| market power (L11) | innovation incentives (O31) |
| reduced market power (D49) | innovation incentives (O31) |
| FTC ruling (L51) | relative increase in innovation (O35) |
| FTC ruling (L51) | new entrants' innovation activities (O36) |