Resource Allocation When Projects Have Ranges of Increasing Returns
44 Pages Posted: 27 Jun 2008
Date Written: April 28, 2008
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: Suggested Citation