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Incentives and Choice in Health Care$
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Frank A. Sloan and Hirschel Kasper

Print publication date: 2008

Print ISBN-13: 9780262195775

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262195775.001.0001

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PRINTED FROM MIT PRESS SCHOLARSHIP ONLINE (www.mitpress.universitypressscholarship.com). (c) Copyright The MIT Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in MITSO for personal use.date: 26 July 2021

The Effects of Incentives on Pharmaceutical Innovation

The Effects of Incentives on Pharmaceutical Innovation

Chapter:
(p.226) (p.227) 9 The Effects of Incentives on Pharmaceutical Innovation
Source:
Incentives and Choice in Health Care
Author(s):

Frank A. Sloan

Chee-Ruey Hsieh

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262195775.003.0009

This chapter examines the role of incentives in technological innovation in the pharmaceutical industry. Pharmaceutical companies make significant investments in research to discover and develop new and improved drug products, but not when they expect no adequate returns in advance. According to another view, certain controls, such as price controls and/or stringent utilization standards, are required to prevent companies from earning economic rents by introducing new products that result only in substantial increases in health expenditures. Patents create market power that allows pharmaceutical research firms to recoup their research and development cost, thus creating incentives for innovation. A crucial feature of the pharmaceutical sector is the large initial fixed cost of research and development and the small marginal cost of producing and distributing drugs. The chapter cites empirical evidence suggesting that incentives stimulate research and development.

Keywords:   incentives, technological innovation, pharmaceutical industry, investments, economic rents, patents, research and development, marginal cost

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