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A Model of Project Evaluation with Limited Attention

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  • Gifford, Sharon
  • Wilson, Charles A

Abstract

This paper characterizes the optimal policy for a model in which manager may adopt an endogenous number of projects but has only limited resources to devote to their evaluation and maintenance. In any period, the manager may discard any subset of existing projects but may evaluate only one existing or one new project which is then either discarded or restored. Both its current return and the probability with which a project may be restored depends only on the number of periods since its last evaluated. For a manager whose objective is to maximize the sum of discounted returns, the optimal policy takes one of two forms. A "discard" policy specifies that the manager evaluate a new project in each period and discard current projects at some critical age. An "age inspection" policy specifies that the manager evaluate a new project only if all current projects are sufficiently young.

Suggested Citation

  • Gifford, Sharon & Wilson, Charles A, 1995. "A Model of Project Evaluation with Limited Attention," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 67-78, January.
    • Handle: RePEc:spr:joecth:v:5:y:1995:i:1:p:67-78
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    Cited by:

    1. Hirshleifer, David & Lim, Seongyeon & Teoh, Siew Hong, 2004. "Disclosure to an Audience with Limited Attention," Working Paper Series 2004-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    2. Mark Casson & Nigel Wadeson, 2007. "The Discovery of Opportunities: Extending the Economic Theory of the Entrepreneur," Small Business Economics, Springer, vol. 28(4), pages 285-300, April.
    3. Sharon Gifford, 1994. "A Review of Milgrom and Roberts'sEconomics, Organization and Management," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(2), pages 407-436, June.
    4. Gifford, Sharon, 1999. "Efficient moral hazard," Journal of Economic Behavior & Organization, Elsevier, vol. 40(4), pages 427-442, December.
    5. Gifford, Sharon, 1997. "Limited attention and the role of the venture capitalist," Journal of Business Venturing, Elsevier, vol. 12(6), pages 459-482, November.
    6. Hirshleifer, David & Lim, Sonya S. & Teoh, Siew Hong, 2004. "Disclosure to a Credulous Audience: The Role of Limited Attention," MPRA Paper 5198, University Library of Munich, Germany.
    7. Anthony Heyes & Sandeep Kapur, 2023. "The precautionary principle when project implementation capacity is congestible," Theory and Decision, Springer, vol. 95(4), pages 691-711, November.

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