Applied  Seminar 
Time: 12:15 pm – 13:30 pm
Date: 10th of January
Room : 3001

Anais Galdin (Princeton) “Resilience of Global Supply Chains and Generic Drug Shortages”

Abstract :This paper studies the lack of resilience of global pharmaceutical supply chains since 2009 and the extent to which the offshoring of manufacturing plants to South-East Asia is driving persistent drug shortages in the United States. I build a novel dataset that, for the first time, allows to determine the exact manufacturing location of drug products sold in the U.S. The data solve the traceability issue in the market and enable me to document new empirical evidence on the causal impact of offshoring on decreased pharmaceutical supply chain resilience. Compared to their U.S.-made counterparts, drugs offshored to South-East Asia are 56% more likely to face shortages, which last 130 days longer on average. To unveil the incentive mechanisms behind supply disruption, I develop and estimate a structural model of spatial location choices and global drug procurement. Suppliers trade off supply reliability and cost-cutting, which endogenously generates shortages. The fundamental problem with the market lies in its inability to capture and reward supply reliability under the current procurement system. Offshoring serves as a lever for drug manufacturers to exploit laxer regulatory oversight and target higher disruption risks than permissible in the U.S., in exchange for lower production costs. The resulting increase in average supply disruption risk, coupled with short-term pricing and capacity rigidities in generic injectable drug markets, translates into shortages. I use the estimated model to analyze two types of counterfactuals: reshoring production and modifying procurement contracts. While reshoring does not achieve the first best, enforcing failure-to-supply clauses in contracts effectively rewards supply reliability through higher producer margins. The net consumer welfare gains of reducing shortages may be large and are not offset by the associated increase in drug prices.

Organizers: Gregory CORCOS