Endogenous productivity of demand-induced R&D: evidence from pharmaceuticals

We examine trends in the productivity of the pharmaceutical sector over the past three decades. Motivated by Ricardo's insight that productivity and rents are endogenous to demand when inputs are scarce, we examine the industry's aggregate Research and Development (R&D) production function. Using exogenous demand shocks to instrument investments, we find that demand growth can explain a large portion of R&D growth. Returns to scale have...