Demand Shocks, Procurement Policies, and the Nature of Medical Innovation: Evidence from Wartime Prosthetic Device Patents
We analyze wartime prosthetic device patents to investigate how procurement policy affects the cost, quality, and quantity of medical innovation. Analyzing whether inventions emphasize cost and/or quality requires generating new data. We do this by first hand-coding the economic traits emphasized in 1,200 patent documents. We then train a machine learning algorithm and apply the trained models to a century's worth of medical and mechanical patents that form our analysis sample. In our analysis of these new data, we find that the relatively stingy, fixed-price contracts of the Civil War era led inventors to focus broadly on reducing costs, while the less cost-conscious procurement contracts of World War I did not. We provide a conceptual framework that highlights the economic forces that drive this key finding. We also find that inventors emphasized dimensions of product quality (e.g., a prosthetic's appearance or comfort) that aligned with differences in buyers' preferences across wars. Finally, we find that the Civil War and World War I procurement shocks led to substantial increases in the quantity of prosthetic device patenting relative to patenting in other medical and mechanical technology classes. We conclude that procurement environments can significantly shape the scientific problems with which inventors engage, including the choice to innovate on quality or cost.
We thank Joshua Chan and Yutong Wu for excellent research assistance. Many thanks to Guy Hasegawa for his generous assistance in sending us copies of archival materials used for his book “Mending Broken Soldiers.” Thanks also to Rosemary Stevens and Rich Meckel for providing valuable perspective on the historical episodes we analyze. We also thank Dave Chan, Julie Cullen, Gordon Dahl, Michael Dickstein, Christian Dippel, Itzik Fadlon, Alex Gelber, Michela Giorcelli, Roger Gordon, Kate Ho, Neale Mahoney, Markus Nagler, Karthik Muralidharan, Elena Patel, Julian Reif, Kaspar Wuthrich, and seminar participants at the 2018 AEI Economists Roundtable, the 2019 Junior Health Economics Summit, the 2019 SIEPR Post-Doc Conference, the 2019 NTA Meetings, UNLV, and the Center for Economic Studies in Munich. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.