IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v105y2015i7p2044-85.html
   My bibliography  Save this article

Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials

Author

Listed:
  • Eric Budish
  • Benjamin N. Roin
  • Heidi Williams

Abstract

We investigate whether private research investments are distorted away from long-term projects. Our theoretical model highlights two potential sources of this distortion: short-termism and the fixed patent term. Our empirical context is cancer research, where clinical trials—and hence, project durations—are shorter for late-stage cancer treatments relative to early-stage treatments or cancer prevention. Using newly constructed data, we document several sources of evidence that together show private research investments are distorted away from long-term projects. The value of life-years at stake appears large. We analyze three potential policy responses: surrogate (non-mortality) clinical-trial endpoints, targeted R&D subsidies, and patent design. (JEL D92, G31, I11, L65, O31, O34)

Suggested Citation

  • Eric Budish & Benjamin N. Roin & Heidi Williams, 2015. "Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials," American Economic Review, American Economic Association, vol. 105(7), pages 2044-2085, July.
    • Handle: RePEc:aea:aecrev:v:105:y:2015:i:7:p:2044-85
    Note: DOI: 10.1257/aer.20131176
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.20131176
    Download Restriction: no
    File URL: https://www.aeaweb.org/aer/ds/10507/20131176_ds.zip
    Download Restriction: no
    File URL: https://www.aeaweb.org/aer/data/10507/20131176_data.zip
    Download Restriction: no
    File URL: https://www.aeaweb.org/aer/app/10507/20131176_app.pdf
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Petra Moser, 2005. "How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World's Fairs," American Economic Review, American Economic Association, vol. 95(4), pages 1214-1236, September.
    2. Gene M. Grossman & Edwin L.-C. Lai, 2004. "International Protection of Intellectual Property," American Economic Review, American Economic Association, vol. 94(5), pages 1635-1653, December.
    3. Bénédicte Vidaillet & V. d'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
    4. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-918, December.
    5. Nicholas Bloom & Mark Schankerman & John Van Reenen, 2013. "Identifying Technology Spillovers and Product Market Rivalry," Econometrica, Econometric Society, vol. 81(4), pages 1347-1393, July.
    6. Sakakibara, Mariko & Branstetter, Lee, 2001. "Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law Reforms," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 77-100, Spring.
    7. Pierre Dubois & Olivier de Mouzon & Fiona Scott-Morton & Paul Seabright, 2015. "Market size and pharmaceutical innovation," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 844-871, October.
    8. Malani, Anup & Philipson, Tomas J., 2011. "Can Medical Progress be Sustained? Implications of the Link Between Development and Output Markets," Working Papers 237, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    9. Philipson Tomas J & Jena Anupam B, 2006. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer Surpluses for HIV/AIDS Drugs," Forum for Health Economics & Policy, De Gruyter, vol. 9(2), pages 1-33, January.
    10. Lakdawalla, Darius N. & Sun, Eric C. & Jena, Anupam B. & Reyes, Carolina M. & Goldman, Dana P. & Philipson, Tomas J., 2010. "An economic evaluation of the war on cancer," Journal of Health Economics, Elsevier, vol. 29(3), pages 333-346, May.
    11. Michael Kremer, 1998. "Patent Buyouts: A Mechanism for Encouraging Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1137-1167.
    12. Kremer, Michael R., 1998. "Patent Buyouts: A Mechanism for Encouraging Innovation," Scholarly Articles 3693705, Harvard University Department of Economics.
    13. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 1049-1090.
    14. Schankerman, Mark & Pakes, Ariel, 1986. "Estimates of the Value of Patent Rights in European Countries during the Post-1950 Period," Economic Journal, Royal Economic Society, vol. 96(384), pages 1052-1076, December.
    15. Josh Lerner, 2002. "150 Years of Patent Protection," American Economic Review, American Economic Association, vol. 92(2), pages 221-225, May.
    16. Tomas J. Philipson & Gary Becker & Dana Goldman & Kevin M. Murphy, 2010. "Terminal Care and The Value of Life Near Its End," NBER Working Papers 15649, National Bureau of Economic Research, Inc.
    17. Lichtenberg Frank R., 2013. "The Effect of Pharmaceutical Innovation on Longevity: Patient Level Evidence from the 1996–2002 Medical Expenditure Panel Survey and Linked Mortality Public-use Files," Forum for Health Economics & Policy, De Gruyter, vol. 16(1), pages 1-33, January.
    18. Hemphill, C. Scott & Sampat, Bhaven N., 2012. "Evergreening, patent challenges, and effective market life in pharmaceuticals," Journal of Health Economics, Elsevier, vol. 31(2), pages 327-339.
    19. Paul Klemperer, 1990. "How Broad Should the Scope of Patent Protection Be?," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 113-130, Spring.
    20. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    21. James Hammitt & Kevin Haninger, 2010. "Valuing fatal risks to children and adults: Effects of disease, latency, and risk aversion," Journal of Risk and Uncertainty, Springer, vol. 40(1), pages 57-83, February.
    22. Henry G. Grabowski & Margaret Kyle, 2007. "Generic competition and market exclusivity periods in pharmaceuticals," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 491-502.
    23. Josh Lerner, 2002. "Patent Protection and Innovation Over 150 Years," NBER Working Papers 8977, National Bureau of Economic Research, Inc.
    24. Amy Finkelstein, 2004. "Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 527-564.
    25. Kitch, Edmund W, 1977. "The Nature and Function of the Patent System," Journal of Law and Economics, University of Chicago Press, vol. 20(2), pages 265-290, October.
    26. Peter Lindgren & Bengt Jönsson, 2012. "Cost–effectiveness of statins revisited: lessons learned about the value of innovation," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 13(4), pages 445-450, August.
    27. Richard Gilbert & Carl Shapiro, 1990. "Optimal Patent Length and Breadth," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 106-112, Spring.
    28. Scherer, F M, 1972. "Nordhaus' Theory of Optimal Patent Life: A Geometric Reinterpretation," American Economic Review, American Economic Association, vol. 62(3), pages 422-427, June.
    29. Kevin M. Murphy & Robert H. Topel, 2006. "The Value of Health and Longevity," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 871-904, October.
    30. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3, Specia), pages 783-832.
    31. E. Glen Weyl & Jean Tirole, 2012. "Market Power Screens Willingness-to-Pay," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(4), pages 1971-2003.
    32. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
    33. Suzanne Scotchmer, 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 29-41, Winter.
    34. Tomas J. Philipson & Gary Becker & Dana Goldman & Kevin M. Murphy, 2010. "Terminal Care and The Value of Life Near Its End," NBER Working Papers 15649, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers 13-001, Stanford Institute for Economic Policy Research.
    2. Heidi L. Williams, 2016. "Intellectual Property Rights and Innovation: Evidence from Health Care Markets," Innovation Policy and the Economy, University of Chicago Press, vol. 16(1), pages 53-87.
    3. Anja, Breitwieser & Neil, Foster, 2012. "Intellectual property rights, innovation and technology transfer: a survey," MPRA Paper 36094, University Library of Munich, Germany.
    4. Rockett, Katharine, 2010. "Property Rights and Invention," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 315-380, Elsevier.
    5. Neves, Pedro Cunha & Afonso, Oscar & Silva, Diana & Sochirca, Elena, 2021. "The link between intellectual property rights, innovation, and growth: A meta-analysis," Economic Modelling, Elsevier, vol. 97(C), pages 196-209.
    6. Gamba, Simona, 2017. "The Effect of Intellectual Property Rights on Domestic Innovation in the Pharmaceutical Sector," World Development, Elsevier, vol. 99(C), pages 15-27.
    7. Heidi L. Williams, 2017. "How Do Patents Affect Research Investments?," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 441-469, September.
    8. Cohen, Wesley M., 2010. "Fifty Years of Empirical Studies of Innovative Activity and Performance," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 129-213, Elsevier.
    9. Grönqvist, Charlotta, 2009. "Empirical studies on the private value of Finnish patents," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2009_041, December.
    10. Iain M. Cockburn & Jean O. Lanjouw & Mark Schankerman, 2016. "Patents and the Global Diffusion of New Drugs," American Economic Review, American Economic Association, vol. 106(1), pages 136-164, January.
    11. Kyle, Margaret K., 2022. "Incentives for pharmaceutical innovation: What’s working, what’s lacking," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    12. Wright, Brian D. & Pardey, Philip G. & Nottenburg, Carol & Koo, Bonwoo, 2007. "Agricultural Innovation: Investments and Incentives," Handbook of Agricultural Economics, in: Robert Evenson & Prabhu Pingali (ed.), Handbook of Agricultural Economics, edition 1, volume 3, chapter 48, pages 2533-2603, Elsevier.
    13. Sam Meng, 2019. "A New Design for the Patent System," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(3), pages 1204-1229, September.
    14. Arora, Ashish & Ceccagnoli, Marco & Cohen, Wesley M., 2008. "R&D and the patent premium," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1153-1179, September.
    15. Nancy Gallini, 2017. "Do patents work? Thickets, trolls and antibiotic resistance," Canadian Journal of Economics, Canadian Economics Association, vol. 50(4), pages 893-926, November.
    16. Kamal Saggi, 2016. "Trade, Intellectual Property Rights, and the World Trade Organization," Vanderbilt University Department of Economics Working Papers 16-00014, Vanderbilt University Department of Economics.
    17. Shiyuan Pan & Heng-fu Zou & Tailong Li, 2010. "Patent Protection, Technological Change and Wage Inequality," CEMA Working Papers 437, China Economics and Management Academy, Central University of Finance and Economics.
    18. Branstetter, Lee & Chatterjee, Chirantan & Higgins, Matthew J., 2022. "Generic competition and the incentives for early-stage pharmaceutical innovation," Research Policy, Elsevier, vol. 51(10).
    19. Malte Mosel, 2009. "Competition, imitation, and R&D productivity in agrowth model with sector-specific patent protection," Working Papers 084, Bavarian Graduate Program in Economics (BGPE).
    20. Dosi, Giovanni & Palagi, Elisa & Roventini, Andrea & Russo, Emanuele, 2023. "Do patents really foster innovation in the pharmaceutical sector? Results from an evolutionary, agent-based model," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 564-589.

    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:105:y:2015:i:7:p:2044-85. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.