Endogenous Productivity of Demand-Induced R&D: Evidence from Pharmaceuticals

49 Pages Posted: 29 Sep 2017 Last revised: 6 Aug 2019

See all articles by Kyle Myers

Kyle Myers

Harvard University - Technology & Operations Management Unit

Mark V. Pauly

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

Date Written: January 18, 2019

Abstract

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

Suggested Citation

Myers, Kyle and Pauly, Mark V., Endogenous Productivity of Demand-Induced R&D: Evidence from Pharmaceuticals (January 18, 2019). Becker Friedman Institute for Research in Economics Working Paper No.2017-06. Available at SSRN: https://ssrn.com/abstract=3043897 or http://dx.doi.org/10.2139/ssrn.3043897

Kyle Myers (Contact Author)

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States

Mark V. Pauly

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

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