How Does Product Liability Risk Affect Innovation? Evidence from Medical Implants

by Alberto Galasso and Hong Luo

Overview — This analysis examines how a surge in liability risk faced by upstream suppliers of general purpose technologies (polymers) affected downstream innovation in implant technologies. Implant patenting dropped by 36 percent relative to non-implant technologies.

Author Abstract

Liability laws designed to compensate for harms caused by defective products may also affect innovation incentives. This paper examines this issue, exploiting a major quasi-exogenous increase in liability risk faced by U.S. suppliers of polymers used to manufacture medical devices implanted in human bodies. Difference-in-differences analyses suggest that the surge in liability risk had a large and negative impact on downstream innovation in medical implants but no significant effect on upstream polymer patenting. These findings show how tort laws may affect the development of new technologies and how liability risk may percolate through an industry’s vertical chain.

Paper Information