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Optimal Dynamic R&D Programs
Gene M. Grossman
Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Carl Shapiro
University of California, Berkeley - Haas School of Business
March 1988
NBER Working Paper No. w1658
Abstract:
We study the optimal pattern of outlays for a single firm pursuing an R&D program over time. In the deterministic case, (a) the amount of progress required to complete the project is known, and (b) the relationship between outlays and progress is known. In this case, it is optimal to increase effort over time as the project nears completion. Relaxing (a), we find in general a simple, positive relationship between the optimal expenditure rate at any point in time and the (expected) value at that time of the research program. We also show that, for a given level ofexpected difficulty, a riskier project is always preferred to a safe project. Relaxing (b), we find again that research outlays increase as further progressis made.
Number of Pages in PDF File: 35
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Date posted: June 19, 2004
Suggested CitationGrossman, Gene M. and Shapiro, Carl, Optimal Dynamic R&D Programs (March 1988). NBER Working Paper No. w1658. Available at SSRN: http://ssrn.com/abstract=338750
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