Private and Social Returns to R&D: Drug Development and Demographics

Investment in intangible capital such as R&D has increased dramatically since the 1990s. However, productivity growth remains sluggish in recent years. One potential reason is that a significant share of the increase in intangible investment is geared toward consumer products such as pharmaceutical drugs with limited spillovers to productivity. We document that a significant share of R&D spending in the United States is done by pharmaceutical firms and geared to developing drugs for older patients. Increased life expectancy and quality of life for the elderly increases welfare but may not be reflected in estimates of total factor productivity.