Research and the Approval Process ∗

An agent (such a pharmaceutical company) sequentially collects information (through clinical trials) to obtain a principal’s (the FDA) approval (to introduce a new drug). Principal and agent both pay the cost of information, but they derive different payoffs from adoption. We characterize how the principal can benefit from commitment to an approval standard and how the commitment solution compares to the equilibrium outcome in the absence of commitment. We also analyze the welfare impact of strategic misrepresentation of information by the agent. The analysis sheds light on the historical evolution of regulation of the drug approval process as well as on proposed reforms. Beyond approval regulation, we discuss applications to the scientific publication process and to the production of information for decision making within firms.