A recent NBER working paper should cause lawmakers who favor some type of price controls on prescription drugs to rethink their position. Joseph Golec and John Vernon examine the effects that prescription drug price controls have in European Union countries. Here's the abstract:

EU countries closely regulate pharmaceutical prices whereas the U.S. does not. This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms. Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D). Some differences have increased over time. In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

As the paper points out, Europeans do pay less than Americans for prescription drugs. Innovation, however, is the casualty of these lower costs. Even those who bemoan drug companies' profitability should have a hard time arguing on behalf of policies that would adversely affect research--and the new drugs that come from this research--that can improve lives.