The impact of regulation on pharmaceutical research expenditures: a dynamic approach

This paper estimates the impact of federal regulation of drug quality on research spending by the pharmaceutical industry. The theoretical approach recognizes that the effects of these regulations on research spending depend upon the reactions of R&D decision makers and the information available during project selection. The information available to R&D decision makers in the 1960s suggests that it would have been difficult for them to forecast accurately regulatory effects on research profitability. As better information developed in the late 1960s and early 1970s, however, regulation had a significant effect on research spending. These differences in response are tested econometrically and prove to be empirically significant. The estimates of current regulatory effects on pharmaceutical R&D spending are quite large.