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Optimal R&D programs in a random environment

Published online by Cambridge University Press:  14 July 2016

M. J. M. Posner  and
D. Zuckerman
M. J. M. Posner*
Affiliation:
University of Toronto
D. Zuckerman*
Affiliation:
Hebrew University, Jerusalem
*
∗Postal address: Department of Industrial Engineering, University of Toronto, Toronto, Ontario M5S 1A4, Canada.
∗∗Postal address: School of Business Administration, Hebrew University, Mount Scopus, Jerusalem 91905, Israel.
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Abstract

Our study examines a stochastic R&D model with flexible termination time and without rivalry. Specifically, we assume a stochastic relationship between expenditures rate and the project's status. Furthermore, the termination time of the project is incorporated into the R&D model as a decision variable by allowing the controller to ‘sell' the obtained technology from the project at any point of time. The proposed framework extends the classical approach in the R&D literature.

The main purpose of our study is to determine the optimal stopping time of the project and to characterize qualitatively the firm's expenditure strategy. We show that under certain realistic conditions, the optimal stopping strategy is a control limit policy. Furthermore, the research effort increases monotonically over the development time of the project.

Keywords

RESEARCH AND DEVELOPMENTEXPENDITURE PATTERNSTOPPING TIMECONTROL LIMIT POLICY
Type
Research Papers
Information
Journal of Applied Probability , Volume 27 , Issue 2 , June 1990 , pp. 343 - 350
Copyright
Copyright © Applied Probability Trust 1990 

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Footnotes

The authors acknowledge the financial support of the Programme of Canadian Studies at the Hebrew University, and the Natural Sciences and Engineering Research Council of Canada under grant A4374.

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