Journal of Law, Economics, and Organization Advance Access published online on April 22, 2009
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewp002
Early Entrant Protection in Approval Regulation: Theory and Evidence from FDA Drug Review
Harvard University
Harvard University
Harvard University
Collin County Community College
Columbia University
Harvard University
Harvard Medical School
* Department of Government, Harvard University, Cambridge, Massachusetts. Email: dcarpenter{at}gov.harvard.edu.
Early entrant protection in approval regulation exists when the first incumbents in an exclusive market niche receive more favorable regulatory treatment than later entrants. We show that this pattern can prevail for two reasons: regulatory capture and consumer co-optation. We consider a decision-theoretic model of dynamic product approval by an uncertain regulator. The model predicts early entrant protection even when later entrants offer quality improvements over market incumbents. We then test the model using duration analyses of New Drug Application approval times for 1080 new molecular entities submitted to the US Food and Drug Administration (FDA) from 1950 to 2006 and later approved. FDA approval times are shown to be increasing in order of market entry for the entire period studied and across numerous subsamples. A standard deviation rise in the log of order of entry is associated with a 3.6-month increase in expected FDA approval time. The entry-order gradient appears to be heavily influenced by disease-level variables but not by firm-level effects, supporting a consumer co-optation explanation and disfavoring capture and producer rent-seeking accounts. The gradient appears heightened by the 1962 Kefauver-Harris Amendments but unaffected by the 1992 Prescription Drug User Fee Act; the influence of some disease-level factors upon the gradient may have been reduced by the 1992 statute. (JEL C44, I18, L51, H11)