Endogenous Productivity of Demand-Induced R&D: Evidence from Pharmaceuticals
49 Pages Posted: 29 Sep 2017 Last revised: 6 Aug 2019
Date Written: January 18, 2019
We examine trends in the productivity of the pharmaceutical sector over the past three decades. Motivated by Ricardo’s insight that productivity and rents are endogenous to demand when inputs are scarce, we examine the industry’s aggregate R&D production function. Using exogenous demand shocks to instrument investments, we find that demand growth can explain a large portion of R&D growth. Returns to scale have been stable whereas total factor productivity has declined significantly. Predicted rents based on our estimates and Ricardo’s theory closely match the trends we observe.
Keywords: Innovation; Productivity; Pharmaceuticals
JEL Classification: D20, L10, L65, O31
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