The Political Demand for FDA's New Drug Approval Process: A Reply to Peltzman

Peltzman (1973), the only economic analysis of FDA’s New Drug Approval Process, argues that FDA requirements reduce the availability of new drugs diminishing consumer surplus. Seemingly no one benefits, so Peltzman advocates for an unregulated market to enhance social welfare and wonders what explains the political demand for FDA’s regulatory process. We show that the political demand is for FDA as scientific referee, a pure Samuelsonian Public Good, to prevent adverse selection by determining and monitoring the optimal quality of randomized control trials (RCTs), to reduce the private costs of monitoring rival research practices and to reduce the ex-post legal and scientific costs from disputes about new drug claims.

FDA as scientific referee decides ex-ante on the necessary and sufficient quality of RCTs – what we call FDAs rules of the game – before the commercial introduction of new drugs.  New drugs are unavoidably unsafe[1] credence goods with complex safety and efficacy attributes that are only potentially revealed through RCTs of sufficient quality to warrant scientific belief. In the absence of refereed RCTs – in Peltzman’s unregulated market – poor quality, low research cost RCTs outcompete high quality, high research cost RCTs resulting in the commercial introduction of potentially unsafe or ineffective drugs and costly ex post scientific and legal disputes.  RCTs of too high quality raise research costs and reduce the availability of new drugs. Private monitoring costs are high, so when rivals cheat or conduct low cost, low quality RCTs, the incentive is for more to cheat or conduct low quality RCTs. Adverse selection results lowering the average quality of new drugs over time.

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[1] “Unavoidably unsafe” products, sometimes referred to as “inherently dangerous” products are legal terms for specific products in product liability law that includes pharmaceuticals, medical devices, vaccines and sometimes tobacco and alcohol (Gostin 2008).

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