We provide evidence that risk aversion leads pharmaceutical firms to underinvest in radical andnovel innovation. We do so by introducing a new measure of novelty: a drug candidate is novelif it is molecularly distinct from prior candidates. Using our measure, we show that firms face arisk-reward...

To examine the drivers of innovation, this paper studies the global R&D effort to fight the deadliest diseases and presents four results. We find: (1) global pharmaceutical R&D activity - measured by clinical trials - typically follows the 'law of diminishing efforts': i.e. the elasticity of R&D...