Jeffrey Clemens, Parker Rogers, 10 March 2020

Why has medical innovation brought cost-increasing enhancements to quality, rather than cost-reducing advances in productivity? The column uses a new dataset drawn from patents for prosthetic devices to show that the design of incentives for innovators can have substantial effects on these margins. Fixed-price procurement arrangements induce greater effort to reduce production costs than cost-plus procurement arrangements. Procurement models may therefore inadvertently lead to 'missing innovations'.

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