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Examining the link between price regulation and pharmaceutical R&D investment

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  • John A. Vernon

Abstract

This paper examines the link between price regulation and pharmaceutical research and development (R&D) investment. I identify two mechanisms through which price regulation may exert an influence on R&D: an expected‐profit effect and a cash‐flow effect. Using established models of the determinants of pharmaceutical R&D, I exploit a unique fact to quantify firm exposure to pharmaceutical price regulation: relative to the rest of the world, the U.S. pharmaceutical market is largely unregulated with respect to price. Using this fact within the context of a system of quasi‐structural equations, I simulate how a new policy regulating pharmaceutical prices in the U.S. will affect R&D investment. I find that such a policy will lead to a decline in industry R&D by between 23.4 and 32.7%. This prediction, however, is accompanied by several caveats. Moreover, it says nothing about the implications for social welfare; therefore, these issues are also discussed. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • John A. Vernon, 2005. "Examining the link between price regulation and pharmaceutical R&D investment," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-16, January.
    • Handle: RePEc:wly:hlthec:v:14:y:2005:i:1:p:1-16
    DOI: 10.1002/hec.897
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