Expected Profits and the Scientific Novelty of Innovation
71 Pages Posted: 17 Apr 2020
Date Written: March 2020
Innovation policy involves trading off monopoly output and pricing today in exchange for incentives for firms to develop new products. While existing research demonstrates that expected profits fuel R&D investments, little is known about the novelty of funded projects. We expand this literature by examining the scientific novelty of pharmaceutical R&D following the creation of Medicare Part D. We find little evidence that the implied positive demand shock prompted firms to undertake scientifically novel R&D, as measured by whether scientific approaches had been used before. However, some evidence suggests that firms invested in products involving novel combinations of scientific approaches.
Keywords: Pharmaceutical industry, Drugs, Medicare Part D, Science, Novelty
JEL Classification: L65, L51, O31
Suggested Citation: Suggested Citation