When Does Product Liability Risk Chill Innovation? Evidence from Medical Implants
Alberto Galasso (University of Toronto )
Hong Luo (Harvard Business School )

Abstract : Liability laws designed to compensate for harms caused by defective products may also affect innovation. We examine this issue by exploiting a major quasi-exogenous increase in liability risk faced by US suppliers of polymers used to manufacture medical implants. Difference-in-differences analyses show that this surge in suppliers' liability risk had a large and negative impact on downstream innovation in medical implants, but it had no significant effect on upstream polymer patenting. Our findings suggest that liability risk can percolate throughout a vertical chain and may have a significant chilling effect on downstream innovation.

Visibility of Technology and Cumulative Innovation: Evidence from Trade Secrets Laws
Bernhard Ganglmair (ZEW, MaCCI, University of Mannheim)
Imke Reimers (Northeastern University)

Abstract : Patents grant an inventor temporary monopoly rights in exchange for the disclosure of the patented invention. However, if only those inventions that are otherwise already visible are patented (and others kept secret), then the bargain fails. We use exogenous variation in the strength of trade secrets protection from the Uniform Trade Secrets Act to show that a relative weakening of patents (compared to trade secrets) adversely affects patenting of processes more than that of products. Arguing that processes are on average less visible (or self-disclosing) than products, stronger trade secrets have thus a disproportionately negative effect on the disclosure of inventions that are not otherwise visible to society. We develop a structural model of initial and follow-on innovation to determine the effects of such a shift in disclosure on overall welfare in industries characterized by cumulative innovation. In counterfactual analyses, we find that while stronger trade secrets encourage more investment in R&D, they may have negative effects on overall welfare - the result of a significant decline in follow-on innovation. This is especially the case in industries with relatively profitable R&D.

Reducing Drug Prices Without Depressing Innovation
Stephen W. Salant (University of Maryland, University of Michigan)

Abstract : Prices of biopharmaceuticals in the United States exceed the prices of the same drugs negotiated by foreign governments which, in turn, exceed their marginal costs of production. The paper provides a tractable theoretical model that explains these stylized facts while taking account of the structure of the industry. The explanation involves arbitrage-deterrence due to oligopolistic limit-pricing: manufacturers would reject proposed foreign prices any closer to marginal cost because the resulting price differentials would trigger massive arbitrage into the higher price US market. The model is used to predict the consequences of four policies proposed to reduce domestic drug prices: (1) facilitating drug imports from the European Union and Canada; (2) requiring that Medicare pay the same prices for drugs as foreign governments; (3) lowering entry barriers in the downstream channel; and (4) financing the services of downstream players (wholesalers and pharmacies) from manufacturer profits from domestic sales instead of from markups over manufacturer prices. These price-reducing policies would eventually depress drug innovation. Finally, I identify the least expensive complementary policy the government can utilize to maintain the lower domestic price while restoring innovation to its previous level.