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Insurance and Incentives for Medical Innovation

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  • Alan M. Garber
  • Charles I. Jones
  • Paul M. Romer

Abstract

This paper studies the interactions between health insurance and the incentives for innovation. Although we focus on pharmaceutical innovation, our discussion applies to other industries producing novel technologies for sale in markets with subsidized demand. Standard results in the growth and productivity literatures suggest that firms in many industries may possess inadequate incentives to innovate. Standard results in the health literature suggest that health insurance leads to the overutilization of health care. Our study of innovation in the pharmaceutical industry emphasizes the interaction of these incentives. Because of the large subsidies to demand from health insurance, limits on the lifetime of patents and possibly limits on monopoly pricing may be necessary to ensure that pharmaceutical companies do not possess excess incentives for innovation.

Suggested Citation

  • Alan M. Garber & Charles I. Jones & Paul M. Romer, 2006. "Insurance and Incentives for Medical Innovation," NBER Working Papers 12080, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12080
    Note: AG EH PR
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    References listed on IDEAS

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    4. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 205-229.
    5. Crew, Michael A, 1969. "Coinsurance and the Welfare Economics of Medical Care," American Economic Review, American Economic Association, vol. 59(5), pages 906-908, December.
    6. Darius Lakdawalla & Neeraj Sood, 2005. "Insurance and Innovation in Health Care Markets," NBER Working Papers 11602, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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