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R&D competition and the direction of innovation

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  • Bryan, Kevin A.
  • Lemus, Jorge
  • Marshall, Guillermo

Abstract

We propose a model to show that when innovation in a given field becomes more lucrative, its direction can be distorted even though its rate rises. Higher payoffs attract innovators, making the R&D supply side more competitive. This competition endogenously shifts effort toward less promising but quicker-to-invent projects. We empirically quantify the magnitude of this distortion, in the context of pharmaceutical innovation during the Covid-19 pandemic. In the social planner solution, 74 percent more firms would have worked on vaccines and 17 percent more on novel compounds. Policy remedies include advance purchase commitments based on ex-ante value, targeted research subsidies, and antitrust exemptions for joint research ventures.

Suggested Citation

  • Bryan, Kevin A. & Lemus, Jorge & Marshall, Guillermo, 2022. "R&D competition and the direction of innovation," International Journal of Industrial Organization, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:indorg:v:82:y:2022:i:c:s0167718722000170
    DOI: 10.1016/j.ijindorg.2022.102841
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    References listed on IDEAS

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    Cited by:

    1. Haucap, Justus & Stiebale, Joel, 2023. "Non-price effects of mergers and acquisitions," DICE Discussion Papers 402, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Esmée Dijk & José Luis Moraga-González & Evgenia Motchenkova, 2023. "Start-up Acquisitions and the Entrant’s and Incumbent’s Innovation Portfolios," Tinbergen Institute Discussion Papers 23-047/VII, Tinbergen Institute.
    3. Kyle Myers & Wei Yang Tham, 2023. "Money, Time, and Grant Design," Papers 2312.06479, arXiv.org.

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