R&D competition and the direction of innovation

Kevin A. Bryan, Jorge Lemus and Guillermo Marshall

International Journal of Industrial Organization, 2022, vol. 82, issue C

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.

Keywords: Innovation; Direction of innovation; Market inefficiency; Pharmaceutical innovation (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:82:y:2022:i:c:s0167718722000170

DOI: 10.1016/j.ijindorg.2022.102841

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