Tuesday, September 16, 2008

Is the FDA Captured?

Kling at EconLog:
Paternalism of that sort ("stop me before I...") is not in the traditional economic definition of public goods. Maybe the behavioral economists will put it there. If so, then I say we should lash people to the mast lest they be lured by behavioral economics.

Lurking in the background, there is a bootleggers and baptists story that Klein briefly hints at. The large pharmaceutical companies have a huge advantage over small start-ups in having the capital and know-how to run the regulatory gauntlet. The FDA approval process is a wonder drug for stifling competition and keeping the number of new medicines low.
I flesh this quote of Kling's out, first because I love the behavioral economists as siren's analogy, and second because of the application of capture theory. There is no question in my mind that the world is a better place without the murderous FDA at large. However, I am not so confident in the ability of large pharm companies to keep out smaller competitors via the FDA. I used to buy the story, but Richard Epstein really damaged the bootleggar and baptist argument in this particular case.

The Prescription Drug User Fee Act (PDUFA) is enormously popular in the pharm industry, which means firms big and small are willing to pay to get through the regulatory process quicker, not find ways to slow it down (though I concede there may just be a prisoner's dilemma here).

More damning for this argument though, is the use of in-licensing for pharmaceutical patents. The small Mom & Pop experimental lab discover a promising new drug, patent it, but don't have the capital to cover the fixed costs of clinical trials through PDUFA or traditional means. They can auction off an in-license that gives another firm the right to share in the patented drug rights. Since this is highly lucrative and competitive auction, Mom & Pop are going to come away with most of the surplus.

Optimal? No, not even close. However, as long as in-licensing is available I have a lot of doubt about the magnitude of the ability of large firms to crowd out lots of small firm innovation.

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