Excess Commitment in R&D

We investigate how excess commitment to R&D activities impacts innovation outcomes and consumer welfare. Using project- level data on clinical trials by pharmaceutical firms, we document that trials which faced unanticipated delays in the previous trial stage, relative to initial firm expectations or induced by plausibly-exogenous trial site congestion, are significantly less likely to be subsequently suspended. These effects are amplified when the firm’s CEO has a greater wealth exposure to stock price changes and is personally responsible for the project initiation. Delay-induced drug commitment crowds out the initiation of new drug projects. Still, consumers may, in some ways, benefit from firms’ excess commitment in new drug development. Marginally-launched drugs because of excess commitment are not significantly associated with more adverse events, but are significantly more likely to target diseases with no or only few existing medications in the marketplace (orphan drugs).

**Paper is not available yet**