Drugs, population and market size

This paper addresses technological change in the health care sector by focusing in the introduction of new drugs. The paper explores the determinants of the creation of drugs during the second half of the 20th century.; The main hypothesis of the paper is that there exists a virtuous circle in the creation of new drugs. In one hand, we indicate that the continuous increases in population, and thus in the market size of the pharmaceutical sector, will play a fundamental role in explaining this phenomena. On another hand, we argue that population and market size can be endogenously determined by drugs through the impact of drugs over the mortality rate. Hence, these two effects reinforce each other, producing continuous decrements in the mortality rate and sustained increments in the stock of drugs over time. This paper provides a theoretical model that highlights this interaction.; In our setup, consumers purchase either drugs or physical goods to be consumed. Allowing this distinction between these two types of goods permits to obtain prediction concerning the evolution of the health share of income. We provide a simulation showing that health expenditure as share of income increases endogenously. This result is determined by individuals' willingness to spend additional resources in newly created drugs because they value variety in their drug consumption bundle.; To test the hypothesis we obtained, by using a “Freedom Request of Information”, the set of U.S. new molecular entities approved by the FDA during the second half of the 20th century. We decomposed the data in a panel of 15 therapeutic categories over time. Using this data, we test the hypothesis concerning the effect of market size on the introduction of drugs by using different econometric methods. The results are consistent across methods and support our predictions.; Finally, to provide evidence concerning the effect of drugs in the mortality rate, we construct a similar panel of data by matching causes of death reported in the U.S. National Mortality Detail Files and type of drugs. The results show a significant impact of drugs in mortality rates, even after controlling by potential simultaneity.