Download This PaperCrises and the Direction of Innovation
46 Pages Posted: 29 Apr 2020 Last revised: 12 Nov 2020
Date Written: May 4, 2020
Abstract
The value of innovation during crises can be extraordinary. While high payoffs increase the rate of innovation, they also induce a strategic distortion in its direction. High payoffs attract entry by innovators, making the R\&D supply side more competitive. This competition endogenously shifts effort toward less promising but quicker-to-finish inventions. We develop a dynamic structural model quantifying the magnitude of this distortion, even when the value of potential inventions are not observed in the data. As a case study, we estimate entry of vaccines versus therapeutics and novel versus repurposed compounds developed during the COVID-19 pandemic, showing substantial distortion away from vaccines. Policy remedies include advance purchase commitments based on ex-ante value, targeted research subsidies, or antitrust exemptions for joint research ventures.
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