Impediments to Efficient Innovation Sample Clauses

Impediments to Efficient Innovation. The analysis above considered an unregulated, unsubsidized, and competitive insurance market. In practice, however, employer-based health insurance premia are implicitly subsidized, because they are tax-exempt. This affects the optimal level of the insurance premium generally, along with the incentive to innovate, but it does not affect the optimal copayment, or static efficiency in the goods market. If consumers face less than the full price of insurance, monopolists will be able to extract consumer surplus plus the value of the premium subsidy. However, monopolists will continue to have incentives to set the co-payment so as to maximize extractible consumer surplus. The result is that premium subsidies or taxes affect dynamic efficiency, but not static inefficiency, which the monopolist has incentives to maintain. As Xxxxxx, Xxxxx, and Xxxxx (2006b) have argued, this logic suggests that premium subsidies lead to over-innovation. If the innovator can extract total surplus, in addition to the value of the premium subsidy, the return on innovation is too high relative to first-best. The result is too much innovation, but efficient provision of the innovations that exist. Notice that we continue to have the result that two-part pricing erases static losses from monopoly, even in the context of innovation. Additionally, a more complicated model of the innovation process could also lead to inefficiency. In the standard model used above, innovators ought to appropriate the full value of social surplus. Many analysts have pointed out that patent races, public subsidies, and other imperfections can alter this result, so that innovators ought to receive less than social surplus in the first-best allocation. Others, in contrast, have emphasized how little innovators are able to appropriate.11 This is a difficult question to resolve in our context, because — outside of the simple model presented above — there are a great many possible models of the innovation process, each with different implications. Depending on the first-best rate of appropriation, access to two-part health insurance pricing may result in inefficiently high profits. This affects the optimal tax-and- transfer policy that should accompany a functioning market for health insurance — the social planner can undo incentives to over-innovate by taxing the profits of successful innovators. Regardless of dynamic incentives, two-part pricing through health insurance continues to ensure static efficiency, a...