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

Kyle  Myers; Mark  Pauly

Article | RAND Journal of Economics | Fall 2019

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

by Kyle Myers and Mark Pauly

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; Innovation and Invention; Performance Productivity; Pharmaceutical Industry;

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Myers, Kyle, and Mark Pauly. "Endogenous Productivity of Demand-Induced R&D: Evidence from Pharmaceuticals." RAND Journal of Economics 50, no. 3 (Fall 2019): 591–614.

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

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