22 Feb 2021Working Paper Summaries

Private and Social Returns to R&D: Drug Development and Demographics

by Efraim Benmelech, Janice Eberly, Dimitris Papanikolaou, and Joshua Krieger

Research and development (R&D) by pharmaceutical firms focuses disproportionately on medical conditions afflicting the elderly. The proportion of R&D spending targeting older age groups is increasing over time. Even though these investments in R&D prolong life expectancy and improve quality of life, they have little effect on measured productivity and output growth.

Author Abstract

Investment in intangible capital—in particular, research and development—increased dramatically since the 1990s. However, output and measured productivity growth remains sluggish in recent years. One potential reason is that a significant share of the increase in intangible investment is geared toward consumer products such as pharmaceutical drugs that are not included in measured economic output. We document that a significant fraction of total R&D spending in the U.S. economy is done by pharmaceutical firms and is geared to developing drugs for the elderly. Increased life expectancy among the elderly increases welfare, but is not reflected in estimates of total factor productivity.