Health Policy, Price Regulation, and Innovation: Evidence from China's Vaccine Industry

Abstract

This paper investigates the effect of policy-induced market incentives on pharmaceutical innovation in the context of developing countries, where substantial health challenges persist but research and development (R&D) efforts remain limited. We exploit the quasi-experimental setting of a major reform in China's public vaccine system, which involved expanding vaccine coverage while imposing price controls on affected products. Using newly collected data on vaccine clinical trials and revenues, we estimate that China's public vaccine program expansion in 2008--2009 led to an 83\% decrease in new vaccine clinical trials for the policy-affected diseases. This decrease can be attributed to the government's price regulation, which greatly reduced the market revenue of the affected vaccines. Our welfare analysis indicates that for some affected diseases, reducing innovation is welfare-enhancing as the reform has curbed potentially wasteful R&D spending. However, for one disease, the policy-induced reduction in innovation is socially harmful because continued innovation can lead to long-run social benefits by generating more effective products.

Keywords: pharmaceutical innovation, Health policy, price regulation, vaccine industry