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Resource Allocation when Projects Have Ranges of Increasing Returns

  • BOBTCHEFF Catherine

    (LERNA, TSE)

  • GOLLIER Christian

    (LERNA, TSE)

  • ZECKHAUSER Richard

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 LERNA, University of Toulouse in its series LERNA Working Papers with number 07.03.224.

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Date of creation: Aug 2007
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Handle: RePEc:ler:wpaper:07.03.224
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  1. Heal, G.M., 1997. "The Economics of Increasing Returns," Papers 97-20, Columbia - Graduate School of Business.
  2. Ginsberg, William, 1974. "The multiplant firm with increasing returns to scale," Journal of Economic Theory, Elsevier, vol. 9(3), pages 283-292, November.
  3. M. L. Weitzman, 1978. "Optimal Search for the Best Alternative," Working papers 214, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. M. L. Weitzman & K. Roberts, 1979. "Funding Criteria for Research, Development and Exploration Projects," Working papers 234, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Brown, Donald J & Heal, Geoffrey, 1979. "Equity, Efficiency, and Increasing Returns," Review of Economic Studies, Wiley Blackwell, vol. 46(4), pages 571-85, October.
  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. 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.
  8. Cremer, Jacques, 1977. "A Quantity -Quantity Algorithm for Planning under Increasing Returns to Scale," Econometrica, Econometric Society, vol. 45(6), pages 1339-48, September.
  9. Scherer, F. M., 1983. "The propensity to patent," International Journal of Industrial Organization, Elsevier, vol. 1(1), pages 107-128, March.
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