Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-23T01:48:27.098Z Has data issue: false hasContentIssue false
  • English
  • Français

Optimal R&D programs in a random environment

Published online by Cambridge University Press:  14 July 2016

M. J. M. Posner  and
D. Zuckerman
M. J. M. Posner*
Affiliation:
University of Toronto
D. Zuckerman*
Affiliation:
Hebrew University, Jerusalem
*
∗Postal address: Department of Industrial Engineering, University of Toronto, Toronto, Ontario M5S 1A4, Canada.
∗∗Postal address: School of Business Administration, Hebrew University, Mount Scopus, Jerusalem 91905, Israel.
Get access Rights & Permissions [Opens in a new window]

Abstract

Our study examines a stochastic R&D model with flexible termination time and without rivalry. Specifically, we assume a stochastic relationship between expenditures rate and the project's status. Furthermore, the termination time of the project is incorporated into the R&D model as a decision variable by allowing the controller to ‘sell' the obtained technology from the project at any point of time. The proposed framework extends the classical approach in the R&D literature.

The main purpose of our study is to determine the optimal stopping time of the project and to characterize qualitatively the firm's expenditure strategy. We show that under certain realistic conditions, the optimal stopping strategy is a control limit policy. Furthermore, the research effort increases monotonically over the development time of the project.

Keywords

RESEARCH AND DEVELOPMENTEXPENDITURE PATTERNSTOPPING TIMECONTROL LIMIT POLICY
Type
Research Papers
Information
Journal of Applied Probability , Volume 27 , Issue 2 , June 1990 , pp. 343 - 350
Copyright
Copyright © Applied Probability Trust 1990 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors acknowledge the financial support of the Programme of Canadian Studies at the Hebrew University, and the Natural Sciences and Engineering Research Council of Canada under grant A4374.

References

Charnes, A. and Stedry, A. C. (1966) A chance-constrained model for real-time control in research and development management. Management Sci. 12, B-353–B-362.CrossRefGoogle Scholar
Dasgupta, P. and Stiglitz, J. (1980) Industrial structure and the nature of innovative activity. Economic Journal 90, 266–293.CrossRefGoogle Scholar
Deshmukh, S. D. and Chikte, S. D. (1977) Dynamic investment strategies for a risky R and D project. J. Appl. Prob. 14, 144–152.CrossRefGoogle Scholar
Fudenberg, D., Gilbert, R., Stiglitz, J. and Tirole, J. (1983) Preemption, leapfrogging, and competition in patent races. European Econom. Rev. 22, 3–31.CrossRefGoogle Scholar
Gallini, N. and Kotowitz, Y. (1985) Optimal R and D processes and competition. Economica 52, 321–334.CrossRefGoogle Scholar
Grossman, G. and Shapiro, C. (1985a) Optimal dynamic R&D programs. Discussion Paper in Economics No. 94, Woodrow Wilson School, Princeton University.CrossRefGoogle Scholar
Grossman, G. and Shapiro, C. (1985b) Dynamic R&D competition. Discussion Paper in Economics No. 95, Woodrow Wilson School, Princeton University.CrossRefGoogle Scholar
Harris, C. and Vickers, J. (1985) Perfect equilibrium in a model of a race. Rev. Econom. Stud. 52, 193–209.CrossRefGoogle Scholar
Kamien, M. I. and Schwartz, N. L. (1971) Expenditure patterns for risky R and D projects. J. Appl. Prob. 8, 60–73.CrossRefGoogle Scholar
Lee, T. and Wilde, L. (1980) Market structure and innovation: A reformulation, Quart. J. Econom. 94, 429–436.CrossRefGoogle Scholar
Loury, G. C. (1979) Market structure and innovation. Quart. J. Econom. 93, 395–410.CrossRefGoogle Scholar
Lucas, R. (1971) Optimal management of a research and development project. Management Sci. 17, 679–697.CrossRefGoogle Scholar
Park, J. (1987) Dynamic patent races with risky choices. Management Sci. 33, 1563–1571.CrossRefGoogle Scholar
Reinganum, J. (1981) Dynamic games of innovation. J. Econom. Theory. 25, 21–41.CrossRefGoogle Scholar
Roberts, K. and Weitzman, M. (1981) Funding criteria for research, development, and exploration projects. Econometrica 49, 1261–1288.CrossRefGoogle Scholar