Resource Allocation When Projects Have Ranges of Increasing Returns

44 Pages Posted: 27 Jun 2008

See all articles by Catherine Bobtcheff

Catherine Bobtcheff

University of Toulouse 1 - Toulouse School of Economics (TSE)

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: April 28, 2008

Abstract

A fixed budget must be allocated to a finite number of different projects with uncertain outputs. The expected marginal productivity of capital in a project first increases then decreases with the amount of capital invested. Such behavior is common when output is a probability (of escaping infection, succeeding with an R&D project...). When the total budget is below some threshold, it is invested in a single project. Above this cutoff, the share invested in a project can be discontinuous and non-monotone in the total budget. Above an upper cutoff, all projects receive more capital as the budget increases.

Keywords: capital allocation, increasing returns, probabilistic returns, egalitarian allocation, complete specialization

JEL Classification: D24, C60, D84

Suggested Citation

Bobtcheff, Catherine and Gollier, Christian and Zeckhauser, Richard J., Resource Allocation When Projects Have Ranges of Increasing Returns (April 28, 2008). HKS Working Paper No. RWP08-024. Available at SSRN: https://ssrn.com/abstract=1124291 or http://dx.doi.org/10.2139/ssrn.1124291

Catherine Bobtcheff

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

21 allee de Brienne
Toulouse Cedex, F-31042
France

HOME PAGE: http://www.univ-tlse1.fr/60443830/0/fiche___pagelibre/

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 61 12 86 30 (Phone)
+33 61 12 86 37 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Richard J. Zeckhauser (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

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