Candidate Spotlight is a showcase of research by PhD students coming onto the job market from the Department of Economics, University of Toronto. Today’s post introduces Jie Fang whose job market paper entitled When are Patents Traded and Why: A Dynamic Structural Model of Drug Development and Patent Trading examines the role of patent trade and its impact on innovation outcomes and incentives in the pharmaceutical industry. Assistant Professor Murat Çelik, a member of Fang’s supervision committee, describes the paper and its contribution to the discipline.
Jie Fang specializes in industrial organization, with a specific focus on the economics of innovation. She has two complete papers. Each employs a detailed empirical investigation using firm and patent micro-data from the United States, and then uses these datasets to discipline dynamic models employing frontier techniques from the field of industrial organization via structural estimation.
Jie’s job market paper studies the impact of the secondary market for patents on the process of turning ideas into consumer products, with a particular focus on drug development in the pharmaceuticals sector. Jie has created a unique dataset, developed a dynamic structural model, and estimated it to figure out how patent trades improve the success rate of new drugs.
One of the greatest strengths of Jie’s job market paper is the unique dataset she has put together. Her focus on drug development enables her to link rich data that is available due to the regulations set by the U.S. Food and Drug Administration (FDA) to individual drugs and the associated patents. This allows Jie to closely follow each patented drug through the various phases such as (1) the discovery of a molecule and preclinical trials, (2) three distinct phases of clinical trials, (3) FDA review and approval, and (4) the commercial launch of the drug. Combined with granular patent reassignment data from US Patent and Trademark Office, Jie can track which firm owns the patents associated with new drugs at any given time and use this variation to answer the important question she has posed.
Using this rich dataset, Jie builds and estimates an impressive dynamic structural model in which firms who own the primary patent associated with a drug choose between developing the drug on their own, selling it to another firm that might have a higher comparative advantage in the various stages of development, or discarding the project if the expected returns are sufficiently low. When the gains from trade are sufficiently high, firms sell their patent to buyers better suited to develop the product. The estimated model reveals that the secondary market for patents plays a significant role in improving the success rate in drug development and cutting down development costs. Both the firms and the society benefit from an efficient patent market.
Beyond her job market paper which is a demonstration of Jie’s strong technical skills and diligence, she also has another complete paper on how patents developed within a firm and those bought from others affect the production and innovation incentives and outcomes of firms. Using a dynamic structural model, Jie finds that a more efficient patent market would have heterogeneous impacts on firms that specialize in production versus innovation, improving the dynamic allocation of resources and economic efficiency.
Author: Murat Alp Çelik is Assistant Professor of Economics at the University of Toronto. He is the 2023 winner of the Bank of Canada Governor’s Award. His most recent paper is Does the Cream Always Rise to the Top? The Misallocation of Talent in Innovation in the Journal of Monetary Economics.
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