R&D competition and the direction of innovation

Kevin A. Bryan, Jorge Lemus, Guillermo Marshall

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Article number102841
JournalInternational Journal of Industrial Organization
Volume82
DOIs
StatePublished - May 2022

Keywords

  • Direction of innovation
  • Innovation
  • Market inefficiency
  • Pharmaceutical innovation

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

Fingerprint

Dive into the research topics of 'R&D competition and the direction of innovation'. Together they form a unique fingerprint.

Cite this