« Incentivizing Novelty in Antibiotic Development »

Abstract :
In antibiotics, a constant supply of new products is needed as bacteria become resistant to the existing drugs. I estimate the effectiveness of innovation incentives for antibiotics, introduced in 2012. In a difference-in-differences framework, I find that the incentives have a positive effect on clinical trial success rates, but only for projects using known technologies. To assess the long-term effect of the incentives on market entry, I set up a dynamic structural model of pharmaceutical innovation. The multi agent setting of the model allows the firm decisions to depend not only on the projects’ expected cost and profit, but also on the outcomes of technologically close projects. Counterfactual simulations show a 20% increase in the number of market entries due the current incentive scheme, driven mostly by research subsidies.