INSTITUTO MILENIO IMPERFECCIONES DE MERCADO Y POLÍTICA PÚBLICAS
Innovation During a Crisis
12 August, 2020 15:00 hrs
The value of innovation during crises with no adequate existing solution can be extraordinary. While higher payoffs increase the rate of innovation, they can also induce strategic distortion in its direction. We show theoretically that an increase in payoffs increases competition among inventors, inducing a shift toward less promising but quicker-to-finish inventions. Empirically, we estimate the size of the distortion using entry with vaccines versus non-vaccines drugs during the Covid-19 pandemic. Our estimates suggest that a social planner would have increased the number of firms working on vaccines by 15 percent. Policy remedies include advance purchase commitments based on ex-ante value, targeted research subsidies, or antitrust exemptions for joint research ventures.
