TY - JOUR
AU - Philipson,Tomas J.
AU - Sun,Eric
TI - Is the Food and Drug Administration Safe and Effective?
JF - National Bureau of Economic Research Working Paper Series
VL - No. 13561
PY - 2007
Y2 - October 2007
UR - http://www.nber.org/papers/w13561
L1 - http://www.nber.org/papers/w13561.pdf
N1 - Author contact info:
Tomas Philipson
Irving B. Harris Graduate School
of Public Policy Studies
University of Chicago
1155 E. 60th Street
Chicago, IL 60637
Tel: 773/502-7773
E-Mail: t-philipson@uchicago.edu
Eric C. Sun
2940 South Ct
Palo Alto, CA 94306
E-Mail: ericsun@uchicago.edu
AB - In the United States, drug safety and efficacy are primarily regulated by the Food and Drug Administration (FDA) and the legal system, which gives manufacturers large incentives to produce safe drugs and provide proper warnings for side effects, since patients can sue manufacturers that provide unsafe drugs and/or insufficient warnings.
In this paper, we begin by examining the efficiency implications of this joint regulation of drug safety. We find that joint regulation of drug safety can be inefficient when the regulatory authority mandates a binding and well enforced level of safety investment. In this case, product liability has no effect on a firm's safety investment, but affects welfare by raising a firm's costs and therefore prices. Using these results, we calibrate a model of the pharmaceutical market and find that, depending on the share of liability costs in marginal costs, a product liability exemption for activities that are well regulated by the FDA could increase consumer welfare by $47.8-$754.7 billion annually (4-66 percent of sales) and producer welfare by $11.9-$173.9 billion annually (1-15 percent of sales).
In addition, we summarize the welfare effects of recent legislation, the Prescription Drug User Fee Acts (PDUFA), which mandated faster FDA review times in exchange for user fees levied on the pharmaceutical industry. Overall, we find that the faster review times mandated by PDUFA raised social surplus by $18-31 billion, and that at most, the concomitant cost of reduced drug safety was $5.6-$16.6 billion.
ER -