Financing Drug Research: What are the Issues?

The current system of patent financing for prescription drug research leads to large and growing inefficiencies. In addition, patent rents create perverse incentives that can lead to both bad health outcomes and the slowing of the research process. This paper examines several alternative mechanisms for financing prescription drug research including a prize system, an auction-based patent buyout system and direct public funding for research. It outlines the advantages and disadvantages of each system by a series of criteria, including marginal cost pricing, openness of research findings, incentives for excessive marketing and the adequacy of research funding