Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials
Eric Budish, Benjamin N. Roin, Heidi Williams
American Economic Review · 2015 · Volume 105 · Issue 7
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)
Keywords
Intertemporal Firm Choice, Investment, Capacity, and Financing, Capital Budgeting, Fixed Investment and Inventory Studies, Analysis of Health Care Markets, Chemicals, Rubber, Drugs, Biotechnology, Innovation and Invention: Processes and Incentives, Intellectual Property and Intellectual Capital
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