"The most valuable commodity I know of is information."

- Gordon Gekko ("Wall Street", 1987)

Working Paper

PHA Find and Replace: R&D Investment Following the Erosion of Existing Products, with Richard T. Thakor and Joshua L. Krieger [PDF]
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How do innovative firms react when existing products experience negative shocks? We explore this question with detailed project-level data from drug development firms. Using FDA Public Health Advisories as idiosyncratic negative shocks to approved drugs, we examine how drug makers react through investment decisions. Following these shocks, affected firms increase R&D expenditures, driven by a higher likelihood of acquiring external innovations, rather than developing novel projects internally. Such acquisition activities are concentrated in firms with weak research pipelines. We also find that competing developers move resources away from the affected therapeutic areas. Our results show how investments in specialized commercialization capital create path dependencies and alter the direction of R&D investments.

Minor Revision, Management Science.

vcpharm Common Ownership and Innovation Efficiency, with Tong Liu and Lucian A. Taylor [PDF] [Online Appendix]
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How does common ownership affect innovation? We study this question using project-level data on pharmaceutical startups and their venture capital (VC) investors. We find that common VC ownership reduces duplication of R&D in patent races. Specifically, common ownership leads VCs to shut down lagging drug projects, withhold funding from lagging startups, and redirect those startups' innovation. These results support theories dating back to Loury (1979): By coordinating R&D efforts across firms in a patent race, a common owner can reduce excess R&D. Consistent with common ownership improving innovation efficiency, common ownership rates are positively correlated with the ratio of R&D output to funding.

Covered by Knowledge@Wharton

mod Merchants of Death: The Effect of Credit Supply Shocks on Hospital Outcomes, with Cyrus Aghamolla, Pinar Karaca-Mandic, and Richard T. Thakor, National Bureau of Economic Research No.w28709, [PDF]
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This study examines the link between credit supply and hospital health outcomes. Using detailed data on hospitals and the banks that they borrow from, we use bank stress tests as exogenous shocks to credit access for hospitals that have lending relationships with tested banks. We find that affected hospitals shift their operations to enhance their profit margins in response to a negative credit shock, but reduce the quality of their care to patients across a variety of measures. In particular, affected hospitals exhibit significantly lower attentiveness in providing timely and effective treatment and procedures, and are rated substantially lower in patient satisfaction. This decline in care quality is reflected in health outcomes: affected hospitals experience a significant increase in risk-adjusted, unplanned 30-day readmission rates of recently discharged patients and in risk-adjusted 30-day patient mortality rates. Overall, the results indicate that access to credit can affect the quality of healthcare hospitals deliver, pointing to important spillover effects of credit market frictions on health outcomes.

Covered by Bloomberg

pp Pivots and Prestige: Venture Capital Contracts with Experimentation, with Martin Szydlowski [PDF]
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We study venture capital financing with experimentation. An entrepreneur contracts with an investor and has private information about a project, which requires costly experimentation by both parties to succeed. In equilibrium, investors learn about the project from the arrival of exogenous information and from the entrepreneur's contract offers. The optimal contract features vesting and dilution, consistent with empirical evidence. Pivots and prestige projects emerge as signaling devices. Technological progress, which lowers the cost of experimentation or which increases the rate of learning, makes entrepreneurs pivot more aggressively in equilibrium.

In Progress

1Paying off the Competition: Market Power and Innovation Incentives with Andrew W. Lo and Richard T. Thakor

2 The Race of Unicorns: A Signaling Theory of Private Acquisitions [PDF]

3 Healthcare across Boundaries: Urban-Rural Differences in the Financial and Healthcare Consequences of Telehealth Adoption with Meizi Zhou and Gordon Burtch [PDF]

4Secret Scouting with Fangyuan Yu [PDF]