Abstract
We argue that an increase in investments in R&D for innovative treatments to eradicate neglected diseases in developing countries leads to a rational decrease in investments in available treatment technologies. In a formal model where the government of a developing country seeks to optimally allocate public resources, we show that the higher the odds of appearance of an innovative treatment, as occurring when investments in R&D increase, the lower the optimal provision of current treatments and other health expenditures. We also show that this phenomenon is aggravated when the opportunity cost of investments in current treatments increases. This implies that welfare in developing countries deteriorates as innovative treatments are more likely to become available. We also describe an insurance scheme that remedies these issues, and that leads to Pareto-optimal allocations regardless of the investment level in R&D for innovative treatments.
Published Version
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