1  Find and Replace: R&D Investment Following the Erosion of Existing Products [PDF] [Online Appendix] [Replication Package]
Joshua L. Krieger, Xuelin Li, and Richard T. Thakor
Management Science, 68(9):6552-6571 (September 2022).
Click for Abstract 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.
 2  Common Ownership and Innovation Efficiency [PDF] [Online Appendix]
Xuelin Li, Tong Liu, and Lucian A. Taylor
Journal of Financial Economics, Volume 147, Issue 3, Pages 475-497 (March 2023).

- Covered by Knowledge@Wharton

Click for Abstract 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 ownership leads VCs to hold back projects, withhold funding, and redirect innovation at lagging startups. Effects are stronger where R&D costs are larger, consistent with common owners aiming to cut duplicate costs. Effects are also stronger where technological similarity is greater and preexisting competition is lower, consistent with common owners seeking market power for their surviving projects. Overall, common VC ownership appears to generate social benefits, via improved innovation efficiency, but also social costs.
 3  Financial Effects of Remote Product Delivery: Evidence from Hospitals [PDF]
Kimberly Cornaggia, Xuelin Li, and Zihan Ye
Review of Financial Studies, accepted.
Click for Abstract We study financial effects of remote product delivery in the healthcare industry. Exploiting staggered law adoption for identification, we find that technology innovation facilitating telehealth provision redistributes hospital operations and access to capital away from rural communities. As urban telehealth providers acquire rural patients, rural hospitals experience decreased revenue and profit, credit rating downgrades, increased cost of capital, and ultimately risk of closure. Although telehealth reduces travel costs, some communities lose access to acute care. Overall, we conclude that healthcare technology advancement has financial consequences as well as healthcare effects and that benefits are unequally distributed.

Working Paper

 4  Merchants of Death: The Effect of Credit Supply Shocks on Hospital Outcomes, National Bureau of Economic Research No.w28709 [PDF]
Cyrus Aghamolla, Pinar Karaca-Mandic, Xuelin Li, and Richard T. Thakor
American Economic Review, conditionally accepted.

- Covered by Bloomberg
- Best Paper Award, 2022 Financial Markets and Corporate Governance Conference

Click for Abstract This study examines the link between credit supply and hospital health outcomes. 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 increase resource utilization following a negative credit shock but reduce the quality of their care to patients across a variety of measures, including a significant increase in risk-adjusted readmission and mortality rates. 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.
 5  Paying off the Competition: Market Power and Innovation Incentives, National Bureau of Economic Research No.w28964 [PDF]
Xuelin Li, and Andrew W. Lo and Richard T. Thakor
Review of Finance, revise and resubmit.

- Covered by VoxEU, Wall Street Journal

Click for Abstract How does a firm’s market power in existing products affect its incentives to innovate? We explore this fundamental question using granular project-level and firm-level data from the pharmaceutical industry, focusing on a particular mechanism through which incumbent firms maintain their market power: “reverse payment” or “pay-for-delay” agreements to delay the market entry of competitors. We first show that when firms are unfettered in their use of “pay-for-delay” agreements, they reduce their innovation activities in response to the potential entry of direct competitors. We then examine a legal ruling that subjected these agreements to antitrust litigation, thereby reducing the incentive to enter them. After the ruling, incumbent firms increased their net innovation activities in response to competitive entry. These effects center on firms with products that are more directly affected by competition. However, at the product therapeutic area level, we find a reduction in innovation by new entrants after the ruling in response to increased competition. Overall, these results are consistent with firms having reduced incentives to innovate when they are able to maintain their market power, highlighting a specific channel through which this occurs.
 6  Pivots and Prestige: Venture Capital Contracts with Experimentation [PDF]
Xuelin Li, and Martin Szydlowski
American Economic Journal: Micro, conditionally accepted.
Click for Abstract 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.
 7  Hype Cycles: Dynamic Information Design with Two Audiences [PDF]
Xuelin Li, Martin Szydlowski, and Fangyuan Yu
Journal of the European Economic Association, revise and resubmit.
Click for Abstract We study dynamic Bayesian persuasion in an entry game. A sender publicly reveals information to an adopter and a competitor. When the sender's loss from competition is small, the optimal policy features hype cycles: the sender first exaggerates the value of a technology to attract the adopter, and then reveals negative information to deter the competitor. Otherwise, the optimal policy features caution: the sender first underplays the value of the technology and reveals positive information later. Hype cycles are more severe in stagnant industries and with higher threat of competition, and arise in industries where the adopter's and the competitor's entry decisions are complementary.
 8  Healthcare across Boundaries: Urban-Rural Differences in the Financial and Healthcare Consequences of Telehealth Adoption [PDF]
Meizi Zhou, Xuelin Li, and Gordon Burtch
Information Systems Research, accepted.

- Best Paper Award, 19th ZEW Conference on the Economics of Information and Communication Technologies

Click for Abstract We study the impacts of telehealth adoption on geographic competition among urban and rural healthcare providers. We consider a quasi-natural experiment: states' entry into the Interstate Medical Licensure Compact, wherein the entry events facilitate healthcare providers to adopt telehealth technology. By analyzing a representative sample of providers, we first establish the Compact-entry shock's validity and its positive effect on the supply of medical services. We then report evidence that there are service and payment shifts from rural providers to urban providers, i.e., urban providers are more likely to benefit from the Compact-entry financially. Relying on patients' telehealth reimbursement claim data, we observe two mechanisms contributing to the revenue re-distribution: the substitution and gateway effects of telehealth. Finally, we show that telehealth readiness and service quality moderate the impact of telehealth adoption. These findings speak to both potentially positive and negative consequences for welfare.

In Progress

 1  The Race of Unicorns: A Signaling Theory of Private Acquisitions
 2  Secret Scouting with Fangyuan Yu [PDF]

- Best Student Paper Award, 2020 Midwest Finance Association Annual Meeting