How does market size impact on innovation? In this article we dig into this fundamental issue in the context of Pharmaceutical Industry.
Several issues arose in the literature concerning the reverse causality of market size to innovation. In the following, we try to overcome the latter endogeneity problem through a novel instrument namely, pharmaceutical recalls of drugs.
How does market size impact on market innovation?
Back in 2004, Acemoglu, Linn (2004) tried to instrument market size with market size shifts due to U.S. demographics. Credo (2007), however noticed that the more innovation is carried, the more people age and innovation needs increase. This makes Acemoglu and Linn's (2004) instrument invalid leaving a gap in the literature on the topic.
What we did
We employ a novel Control Function two-step Poisson techniques revealing the huge negative impact of recalls on market size on the first stage and the endogeneity and positive impact of market size on our measure of innovation, active trials.
What we reached
A 10% increase in market size stimulates a 6.3% of new trials.
Would like to deepen the topic without going too much into details? Check out our #ASSA2022 poster below: