Government Free Riding in Medical Research

Investment in research and development provides a public good on which others may free ride. Accordingly, for-profit firms may invest less than is socially optimal, suggesting a role for government. However, the potential for free-riding by other governments may also exist. In addition, government spending may crowd out investment by the private sector or non-governmental organizations (NGOs). Identifying these effects is challenging, because organizations that fund research are likely to consider similar factors, such as disease burden and the state of science. We focus on research for infectious diseases that tend to be neglected by for-profit firms. Using detailed data on funding of research for 15 infectious and parasitic diseases between 2007 and 2013, we estimate the determinants of research funding at the disease, country, and individual-funder levels. The US National Institutes of Health (NIH) spends considerably more than all other organizations, and we assume that smaller funders adjust their investments in response to the NIH. Our results suggest that both free-riding and crowding-out are present when we instrument for NIH funding.