Expected Profits and the Scientific Novelty of Innovation

Innovation policy involves trading off monopoly output and pricing today in exchange for incentives for firms to develop new products. While existing research demonstrates that expected profits fuel R&D investments, little is known about the novelty of funded projects. We expand this literature by examining the scientific novelty of pharmaceutical R&D following the creation of Medicare Part D. We find little evidence that the implied positive demand shock prompted firms to undertake scientifically novel R&D, as measured by whether scientific approaches had been used before. However, some evidence suggests that firms invested in products involving novel combinations of scientific approaches