We investigate how negative product disclosure affects subsequent innovation. In 2019, the U.S. Food and Drug Administration (FDA) terminated an adverse event reporting exemption for a subset of medical device product markets and released 6 million previously withheld adverse events. We find that the rate of innovation in affected device markets declined by 17 percent, primarily driven by firms' responses to information about competitors' products rather than by the loss of ability to withhold information. The decline was attenuated in markets without close substitutes. Despite the overall reduction in innovation rate, firms introduced more incremental but safer and higher quality devices. Taken together, these findings show how large-scale negative product disclosure reshapes the allocation of innovative effort.
By Colleen Cunningham (University of Toronto) and Jennifer Kao (UCLA)
Contact person: Elisabeth Hofmeister
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