Innovation During a Crisis: Evidence from COVID-19
33 Pages Posted: 29 Apr 2020 Last revised: 5 May 2020
Date Written: May 4, 2020
The rate of medical research on COVID-19 is an order of magnitude faster than previous epidemics like Ebola, Zika, and H1N1. Nonetheless, this incredible rate of progress may mask inefficiency in the direction of innovation. Our empirical analysis shows that more severe epidemics, both across diseases and within COVID-19 over time, increase the share of new drug development coming from small firms, consisting of repurposed drugs, and aimed at non-vaccine therapies. We develop a theoretical model of innovation during a crisis explaining these patterns. The model suggests that there are too many quick-to-develop projects, especially from small firms. 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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