Optimal expenditure patterns for risky R&D projects with time-dependent returns

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Abstract:

The basic Lucas model for risky R&D projects is revisited. New solutions for optimal expenditures are explored by exploiting the merits of the theory of differential equations. After applying the calculus of variations, a nonlinear differential equation is presented whose solution provides the optimal control for a constant conditional-completion density function and different time-dependent return models. New, exact, and approximate solutions are presented and discussed. It is found, for the class of risky R&D projects under study, that the behavior over time of the optimal expenditure is functionally similar to that of the expected return.

Document Type: Original Article

DOI: http://dx.doi.org/10.1111/1467-9310.00175

Affiliations: Department of Industrial Engineering and Management, Ben‐Gurion University of the Negev, Israel

Publication date: July 1, 2000

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