This paper formulates an empirical methodology that evaluates pharmaceutical innovation in the American antidepressant market by quantifying patient welfare benefits from innovation. While evaluating pharmaceutical innovation in antidepressants, I uncover and address the moral hazard issue that arises due to the existence of prescription drug insurance coverage. A combination of market-level data, drug and patient characteristics are used to estimate demand for all antidepres-sants between 1980 and 2001. The paper estimates large and varied patient welfare gains due to innovation and helps explain a detected divergence between social and private patient benefits by the existence of insurance
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