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Endogenous productivity of demand‐induced R&D: evidence from pharmaceuticals

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  • Kyle Myers
  • 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 Research and Development (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.

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  • Kyle Myers & Mark Pauly, 2019. "Endogenous productivity of demand‐induced R&D: evidence from pharmaceuticals," RAND Journal of Economics, RAND Corporation, vol. 50(3), pages 591-614, September.
    • Handle: RePEc:bla:randje:v:50:y:2019:i:3:p:591-614
    DOI: 10.1111/1756-2171.12289
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    Cited by:

    1. Ian Goldin & Pantelis Koutroumpis & François Lafond & Julian Winkler, 2024. "Why Is Productivity Slowing Down?," Journal of Economic Literature, American Economic Association, vol. 62(1), pages 196-268, March.

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