Pharmaceutical Product Liability and the Propensity to Patent: An Empirical Firm-Level Investigation

Abstract

Do different pharmaceutical product liability regimes in different countries induce innovation or can they lead to potentially socially undesirable outcomes? We exploit the variation in pharmaceutical liability and litigation rules across firms in pharmaceutical industry and countries to explain the firm-level propensity to innovate. Drawing on a large dataset from European Patent Office (EPO) covering over 9.950 pharmaceutical patents from 63 countries over the period 1991-2015, we compute the conditional probabilities of individual pharmaceutical firms to acquire a valid based patent on the validation outcomes and examine whether different liability regimes encourage or deter firm-level innovation. Our empirical strategy addresses firm-level idiosyncrasies, country-level unobserved effects and common technology shocks that potentially invoke omitted variable bias in the effects of liability regimes on the propensity to patent. Our investigation reveals that liability regimes combined with damage caps, broad statutory excuses and reversed burden of proof have a strong positive effect on the firm-level patent stock and a negative effect upon EPO patent validation rate. The evidence suggests that not all liability rules and related litigation procedures are created equal. Firms are systematically more likely to hold valid patents at the EPO when the liability and litigation rules are not complex and when the damage cap, broad statutory excuses and reversed burden of proof are introduced.