A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity

29 Pages Posted: 10 Oct 2016

See all articles by Mark V. Pauly

Mark V. Pauly

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Kyle Myers

Harvard University - Technology & Operations Management Unit

Date Written: October 2016

Abstract

This paper examines trends in the aggregate productivity of the pharmaceutical sector over the past three decades. We incorporate Ricardo’s insight about demand-driven productivity in settings of variable scarce resources, and estimate the industry’s responsiveness to changes in demand over this timeframe using therapeutic class-specific data. In contrast to many analyses, our empirical estimates indicate that the industry has “met demand” with remarkable consistency since the late-1980s. The growth in total R&D spending, and therefore R&D costs per new drug, appear to have been profitable and productive investments. While we identify a significant increase in the industry’s fixed costs - the intercept of the production function - we find no decline in the marginal productivity of industry investments that might suggest significant supply-side frictions. While we cannot diagnose in detail why average, but not marginal, productivity declined, the data suggests that firms have finally begun to compete down returns from the supranormal levels of decades past.

Suggested Citation

Pauly, Mark V. and Myers, Kyle, A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity (October 2016). NBER Working Paper No. w22720. Available at SSRN: https://ssrn.com/abstract=2850254

Mark V. Pauly (Contact Author)

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
208 Colonial Penn Center
Philadelphia, PA 19104-6358
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kyle Myers

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States

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