There is a great deal of misinformation surrounding the economics of pharmaceutical importation and price regulation. Among economists, the principles governing the relationships between prices, innovation, and pharmaceutical research and development (R&D) investment are incontrovertible. Unfortunately, faulty, non-economic analyses abound on these fundamental relationships, reinforcing economic illiteracy and leading to unfounded U.S. public policy.

Effective public policy debate requires that all parties to the debate be informed and aware of the potential costs and benefits associated with new policies, or changes in existing policies. This has not yet occurred for pharmaceutical importation and price regulation policy. Therefore, the purpose of this paper is to provide a positive (in contrast to a normative) economic analysis of pharmaceutical importation and price regulation.

This paper develops a specialized principal-agent model of the investor-investment advisor relationship and embeds the standard advisory compensation schedule in the model. Advisors are endowed with information-gathering abilities and investors are endowed with funds. Information-gathering services are traded indirectly through the investor's receipt of portfolio returns net of advisory fees. Model results show that the parameters of the compensation schedule are both a function of the idiosyncracies of an advisor's information services and the degree of risk sharing between the advisor and investor. Several predictions of the model are supported using data on mutual fund advisors. Unsupported predictions may be due to self-selection of advisors by risk tolerance.