Monthly Archives: March 2016

Rebecca Diamond and Petra Persson on educational signaling

Rebecca Diamond and Petra Persson:

This paper analyzes the long-term consequences of teacher discretion in grading of high-stakes tests… We document extensive test score manipulation of Swedish nationwide math tests taken in the last year before high school, by showing significant bunching in the distribution of test scores above discrete grade cutoffs… Despite the fact that test score manipulation does not, per se, raise human capital, it has far-reaching consequences for the beneficiaries, raising their grades in future classes, high school graduation rates, and college initiation rates; lowering teen birth rates; and raising earnings at age 23. The mechanism at play suggests important dynamic complementarities: Getting a higher grade on the test serves as an immediate signaling mechanism within the educational system, motivating students and potentially teachers; this, in turn, raises human capital; and the combination of higher effort and higher human capital ultimately generates substantial labor market gains. This highlights that a higher grade may not primarily have a signaling value in the labor market, but within the educational system itself.

Kieu-Trang Nguyen and John Van Reenen on UK R&D tax credit effectiveness

Kieu-Trang Nguyen and John Van Reenen:

In April 2000, the UK joined the growing list of countries offering a more generous tax deal for R&D…

UK R&D began a sharp downhill slide from the early 1980s… the downward trend levelled off in the 2000s, at the same time as the tax credit system became more generous…

Could the improvement in R&D and the tax changes just be a coincidence?

It’s hard to know from the macro data, but there was a neat policy experiment in 2008 that helps to tease this out…

The UK, like most other countries, offers more generous subsidies to small and medium-sized enterprises (SMEs) than larger firms… in 2008, the government decided to raise the thresholds for what counted as an SME only for the R&D tax credit system…

Firms with assets below above €43m but below €86m weren’t counted as SMEs before 2008; then after 2008 they were counted as SMEs! This reduced the cost of their R&D by over 30% – and our research finds that this led to big increases in their R&D…

Elliot Harmon on patent troll venue reform

Elliot Harmon:

There’s a new bill in Congress that would finally address the egregious forum shopping that dominates patent litigation. The Venue Equity and Non-Uniformity Elimination Act of 2016(VENUE Act, S. 2733) would bring a modicum of fairness to a broken patent system…

In 1990, the Federal Circuit (the court that hears appeals of patent lawsuits) ruled that a patent owner can file suit in any district in which the defendant does business. A few years later, the court further clarified that for the purposes of determining where a patent case is heard, a business is considered active in any state in which its products or services are available. No one could have predicted the mess that the court invited with those decisions.

Today, nearly half of all patent lawsuits are filed in one district, the Eastern District of Texas. It’s not hard to see why: Eastern District courts have extremely plaintiff-friendly practices in patent lawsuits. Eastern District judges have adopted practices that can make a patent suitmore expensive for defendants. Eastern District judges have routinely imposed rules seemingly designed to frustrate defendants and raise costs…

Let’s be clear: the VENUE Act won’t end patent trolling. It won’t stop the endless parade ofstupid software patents from the Patent Office. Innovators will still be hit with egregious demand letters all the time, and a lot of them will simply pay the fee rather than fight back.

What it will do is take away one of the trolls’ weapons…

Pharmaceutical drugs aren’t quite the poster child for patents we tend to think they are

Pharmaceutical drugs are the poster child for why we need patents. Huge R&D and regulatory approval (FDA) costs coupled with minimal copying costs would conspire to ensure that pretty much no one would invest in discovering new drugs if we didn’t have patents. But that doesn’t mean that the current patent system is working correctly for drugs. The new blog Pro-Market reports:

In the U.S., drug patents last for 20 years from the date of filing. (Drugs are often protected by multiple patents.) Drug companies, however, utilize a number of methods to extend patents and maintain monopolies, by preventing generic manufacturers from entering the market. One of these tactics is called “evergreening,” or “lifecycle management,” a practice in which patent protections are artificially extended through minor tweaks, such as new dosages or formulations (for instance, creating extended-release versions of existing drugs). The process of making minor alterations that have no therapeutic benefits in order to preserve monopoly profits is also sometimes referred to as “product hopping”: after tweaking the existing formulation of the drug, the companies often drastically limit the supply of the older version, in order to ensure that doctors prescribe the new version.

Other ways to prevent generics from reducing branded drug prices include tactics like “no-authorized-generic,” when a manufacturer of a brand-name drug agrees not to market a generic version of its own once the first generic option is released; and the use of safety guidelines known as REMS as an excuse not to provide generic companies with samples of branded drugs.

Another legal tactic to keep drug prices up is called “pay for delay,” or reverse payment patent settlements. When the patent on a branded drug is about to expire, generic manufacturers looking to release their own versions file a challenge on the patent. In order to protect their patent, pharmaceutical companies pay the generic manufacturers handsomely to delay the introduction of competition to the market. Even after a generic enters the market, there will often be an extended period of time where it is the only generic choice. Essentially, these settlements protect monopoly profits, by allowing branded and generic manufacturers to “share the wealth.”

In 1984, Congress passed the Hatch-Waxman Act, a bill that was meant to balance the need to keep patent protections in order to encourage innovation among pharmaceuticals with the need to encourage generic manufacturers to enter the market more quickly. In many ways, the bill was a success — the number of generic drugs in the market has increased dramatically since 1984 — but one of its unintended consequences was that it also made “pay for delay” common practice…

Also note the benefits of competition after the patents have expired:

If one generic enters the market, though, the effects are swift and dramatic: the average price drops by 6 percent. If two generics enter the market, the price drops by 58 percent. If a market has 20 generics, the price drops by 94 percent. According to the FTC, generics saved consumers $239 billion in 2013 alone…

Christie Aschwanden on a great misconception about p-values in statistics

Christie Aschwanden:

the p-value cannot tell you if your hypothesis is correct. Instead, it’s the probability of your data given your hypothesis. That sounds tantalizingly similar to “the probability of your hypothesis given your data,” but they’re not the same thing, said Stephen Senn, a biostatistician at the Luxembourg Institute of Health. To understand why, consider this example. “Is the pope Catholic? The answer is yes,” said Senn. “Is a Catholic the pope? The answer is probably not. If you change the order, the statement doesn’t survive.”

Hvide and Jones on a natural experiment in patenting

Hans K. Hvide and Benjamin F. Jones

National policies take varied approaches to encouraging university-based innovation. This paper studies a natural experiment: the end of the “professor’s privilege” in Norway, where university researchers previously enjoyed full rights to their innovations. Upon the reform, Norway moved toward the typical U.S. model, where the university holds majority rights. Using comprehensive data on Norwegian workers, firms, and patents, we find a 50% decline in both entrepreneurship and patenting rates by university researchers after the reform. Quality measures for university start-ups and patents also decline…