Innovation and Diffusion of Medical Treatment

61 Pages Posted: 7 May 2018

See all articles by Barton H. Hamilton

Barton H. Hamilton

Washington University, Saint Louis - John M. Olin School of Business

Andrés Hincapié

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business

Nicholas W. Papageorge

Johns Hopkins University Department of Economics

Date Written: May 2018

Abstract

This paper develops and estimates a dynamic structural model of demand for a multi-attribute product. The demand side equilibrium supports a product spectrum, the characteristics of which evolve over time in response to supply innovations induced by the composition and extent of aggregate demand. The direction and speed of innovation is inefficient because individuals create an externality by not accounting for their influence on the discovery process. We apply the model to drugs invented to combat the HIV epidemic, during which frequent, incremental innovations in medication were punctuated by sporadic breakthroughs. In this application products differ in their efficacy and their propensity to cause side effects. Our biennial data on four American cities track a replenished panel of individuals for over twenty years, from when drugs were not only ineffective but also created debilitating side effects, to when the market matured. We find that the externalities are quantitatively important and that even a temporary subsidy would have improved average social welfare and been more equitable.

Suggested Citation

Hamilton, Barton H. and Hincapié, Andrés and Miller, Robert A. and Papageorge, Nicholas W., Innovation and Diffusion of Medical Treatment (May 2018). NBER Working Paper No. w24577. Available at SSRN: https://ssrn.com/abstract=3174509

Barton H. Hamilton (Contact Author)

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive, Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-8057 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/hamiltonb/

Andrés Hincapié

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

102 Ridge Road
Chapel Hill, NC 27514
United States

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Nicholas W. Papageorge

Johns Hopkins University Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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