Missing Markets for Innovation: Evidence from New Uses of Existing Drugs

For large classes of potential inventions, intellectual property rights that are available on paper are either not possible or not profitable for firms to enforce in practice. In this paper, we show that these missing incentives yield quantitatively significant underinvestment in research and development. We develop a simple model that formalizes the conditions under which such missing markets for innovation arise. We identify an empirical setting—research into new uses for existing drugs—in which there is sharp variation in the enforceability of intellectual property rights on otherwise comparable inventions over time. We show that when intellectual property rights become unenforceable, research investment and commercialization nearly cease. In doing so, we test two claims central both to our model and the innovation literature more generally—that stronger intellectual property protection does, in fact, induce investment, and that heterogeneity in the availability of these rights distorts investment. The welfare consequences of inadequate incentives in our empirical context are large. Our estimates suggest that 200-800 new uses for existing drugs would have been developed under counterfactual policies. Measures of the value of these uses drawn from existing literature suggest that the social cost of this particular missing market is on the order of several trillion dollars.