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Resource Allocation When Projects Have Ranges of Increasing Returns

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Author Info
Bobtcheff, Catherine (Toulouse School of Economics)
Gollier, Christian
Zeckhauser, Richard (Harvard U)

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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.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp08-024.

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Date of creation: Apr 2008
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Handle: RePEc:ecl:harjfk:rwp08-024

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C60 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - General

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  1. Rader, Trout, 1970. "Resource Allocation with Increasing Returns to Scale," American Economic Review, American Economic Association, vol. 60(5), pages 814-25, December. [Downloadable!] (restricted)
  2. Scherer, F. M., 1983. "The propensity to patent," International Journal of Industrial Organization, Elsevier, vol. 1(1), pages 107-128, March. [Downloadable!] (restricted)
  3. Ginsberg, William, 1974. "The multiplant firm with increasing returns to scale," Journal of Economic Theory, Elsevier, vol. 9(3), pages 283-292, November. [Downloadable!] (restricted)
  4. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-54, May. [Downloadable!] (restricted)
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  5. Roberts, Kevin & Weitzman, Martin L, 1981. "Funding Criteria for Research, Development, and Exploration Projects," Econometrica, Econometric Society, vol. 49(5), pages 1261-88, September. [Downloadable!] (restricted)
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  6. Aoki, Masahiko, 1971. "An Investment Planning Process for an Economy with Increasing Returns," Review of Economic Studies, Blackwell Publishing, vol. 38(115), pages 273-80, July. [Downloadable!] (restricted)
  7. Brown, Donald J & Heal, Geoffrey, 1979. "Equity, Efficiency, and Increasing Returns," Review of Economic Studies, Blackwell Publishing, vol. 46(4), pages 571-85, October. [Downloadable!] (restricted)
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