our apologies for being so late.
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Market size, innovation and the spectre of endogeneity
Melinda Elias and Aram Harrow
Endogeneity often plagues attempts to find the effect of market size
on innovation. One possible solution (due to Acemoglu and Linn,
2004) is to measure pharmaceutical innovation by new drug approvals
and to estimate market size based on exogenous demographic trends.
We show that this approach is extremely sensitive to (possibly
endogenous) changes over time in the age profiles of markets for
different drug categories. For example, a change of less than 0.2% in
drug usage patterns could be chosen to either eliminate or triple
the estimated effects of market size on new drug approvals. This
sensitivity is a consequence of the strong colinearity between
market size and the time and drug fixed effects.
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the title is so that the first sentence of the paper can be "A spectre
is haunting economics---the spectre of endogeneity." if the crowd
judges this joke too corny, it can be dropped.