Pharmaceutical Industry, Drug Quality and Regulation: Evidence from US and Italy

Vincenzo Atella, Jay Bhattacharya, Lorenzo Carbonari

NBER Working Paper No. 14567
Issued in December 2008
NBER Program(s):   HC   HE

This paper examines the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: minimum efficacy standards (MES) and a mix of minimum efficacy standards and price control mechanisms (MES+PC). Through a simple model of adverse selection we model the interaction between firms, heterogeneous buyers and the regulator. The theoretical analysis provides two results. First, an MES regime provides greater incentives to produce high quality drugs. Second, an MES+PC mix reduces the difference in price between the highest and lowest quality drugs on the market. The empirical analysis based on US and Italian data corroborates these results.

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This paper was revised on December 5, 2011

Acknowledgments

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