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Resource allocation when projects have ranges of increasing returns

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Author Info

  • Catherine Bobtcheff

    ()

  • Christian Gollier
  • Richard Zeckhauser

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.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s11166-008-9044-y
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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 37 (2008)
Issue (Month): 1 (August)
Pages: 1-33

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Handle: RePEc:kap:jrisku:v:37:y:2008:i:1:p:1-33

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Web page: http://www.springerlink.com/link.asp?id=100299

Related research

Keywords: Capital allocation; Increasing returns; Probabilistic returns; Egalitarian allocation; Complete specialization; D24; C60; D84;

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  1. Ginsberg, William, 1974. "The multiplant firm with increasing returns to scale," Journal of Economic Theory, Elsevier, vol. 9(3), pages 283-292, November.
  2. Roberts, Kevin & Weitzman, Martin L, 1981. "Funding Criteria for Research, Development, and Exploration Projects," Econometrica, Econometric Society, vol. 49(5), pages 1261-88, September.
  3. Aoki, Masahiko, 1971. "An Investment Planning Process for an Economy with Increasing Returns," Review of Economic Studies, Wiley Blackwell, vol. 38(115), pages 273-80, July.
  4. Brown, Donald J & Heal, Geoffrey, 1979. "Equity, Efficiency, and Increasing Returns," Review of Economic Studies, Wiley Blackwell, vol. 46(4), pages 571-85, October.
  5. M. L. Weitzman, 1978. "Optimal Search for the Best Alternative," Working papers 214, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Rader, Trout, 1970. "Resource Allocation with Increasing Returns to Scale," American Economic Review, American Economic Association, vol. 60(5), pages 814-25, December.
  7. Heal, G.M., 1997. "The Economics of Increasing Returns," Papers 97-20, Columbia - Graduate School of Business.
  8. Scherer, F. M., 1983. "The propensity to patent," International Journal of Industrial Organization, Elsevier, vol. 1(1), pages 107-128, March.
  9. Cremer, Jacques, 1977. "A Quantity -Quantity Algorithm for Planning under Increasing Returns to Scale," Econometrica, Econometric Society, vol. 45(6), pages 1339-48, September.
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