Expected Profits and the Scientific Novelty of Innovation

72 Pages Posted: 5 May 2020 Last revised: 13 Jul 2023

See all articles by David Dranove

David Dranove

Northwestern University - Kellogg School of Management

Craig Garthwaite

Northwestern University; National Bureau of Economic Research (NBER)

Manuel Hermosilla

Johns Hopkins University - Carey Business School; University of Illinois at Chicago - College of Business Administration

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Date Written: May 2020

Abstract

Innovation policy involves trading off monopoly output and pricing in the short run in exchange for incentives for firms to develop new products in the future. While existing research demonstrates that expected profits fuel R&D investments, little is known about the novelty of the projects funded by these investments. Relying on data that describe the scientific approaches used by a large sample of experimental drug projects, we expand on this literature by examining the scientific novelty of pharmaceutical R&D investments following the creation of the Medicare Part D program. We find little evidence that the positive demand shock implied by this program prompted firms to undertake scientifically novel R&D activity, as measured by whether the specific scientific approach had been used before. However, we find some evidence that firms invested in products involving novel combinations of scientific approaches. These estimates can inform economists and policymakers assessing the tradeoffs associated with marginal changes in commercial returns from newly developed pharmaceutical products.

Suggested Citation

Dranove, David and Garthwaite, Craig and Hermosilla, Manuel, Expected Profits and the Scientific Novelty of Innovation (May 2020). NBER Working Paper No. w27093, Available at SSRN: https://ssrn.com/abstract=3592170

David Dranove (Contact Author)

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Craig Garthwaite

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Manuel Hermosilla

Johns Hopkins University - Carey Business School ( email )

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University of Illinois at Chicago - College of Business Administration ( email )

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