ITLApplied  Computational Mathematics Division
ACMD Seminar Series
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Public Research Funding and Private Innovation: The Case of the Pharmaceutical Industry

Robert Book
The CNA Corporation, Center for Naval Analysis

Tuesday, December 3, 2002 15:00-16:00,
Room 145, NIST North (820)
Tuesday, December 3, 2002 13:00-14:00,
Room 4550

Abstract: The United States has an extensive system of government funding of basic research. The traditional rationale for this policy is that due to inappropriability of research results, the private sector provides suboptimal levels of basic research, and government subsidy will correct this underprovision. In addition, it is likely that higher levels of basic research stimulate higher levels of private applied research by increasing the stock of scientific knowledge. It is possible, however, that government-funded basic research "crowds out" private basic research by reducing its private returns. This may mitigate or even reverse the former effect, so that government funding of basic research may stimulate less, and in the extreme case may even reduce the level of private research relative to the alternative in which basic research is privately funded. In this talk we use data on public and private funding of biomedical research to study the effect of government research funding on private-sector research and development (RD) expenditures and new product development in the pharmaceutical industry. The main finding is that increases in government research funding appear to crowd out private (RD) for approximately the first four years and start to stimulate private research in the fifth year after the increase. A reasonable interpretation is that the direct effect of government funding is to crowd out private basic research in the short run and stimulate private applied research in the long run. The crowding out (substitution) is more pronounced when expenditure levels are measured in constant dollars according to the Biomedical Research and Development Price Index (BRDPI), rather than in current dollars or constant dollars according to the GDP deflator. Numerous robustness checks fail to support alternative interpretations, and anecdotal data from the development of a new class of drugs (COX-2 inhibitors) supports this interpretation. In addition, empirical results fail to show any clear effect of government funding on output in the pharmaceutical industry.
Contact: A. J. Kearsley

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