Expected Profits and the Scientific Novelty of Innovation

71 Pages Posted: 17 Apr 2020

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020

Abstract

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

Dranove, David and Garthwaite, Craig and Hermosilla, Manuel, Expected Profits and the Scientific Novelty of Innovation (March 2020). Available at SSRN: https://ssrn.com/abstract=3563347 or http://dx.doi.org/10.2139/ssrn.3563347

David Dranove

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8682 (Phone)
847-467-1777 (Fax)

Craig Garthwaite

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Manuel Hermosilla (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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