Abstract
This paper deals with the problem of optimal control of R&D. The fundamental aspects of this problem are viewed as: uncertainty about economic parameters of new technology (or new activity, e.g. a search for new oil fields) explored by a group of parallel projects attempting to make advances in this technology as well as improve economic data; allocation of investments among rival projects under a given total budget; timing of the ultimate selection of new technology (activity) according to the most successful project. The process of data improvement (PDI) is described as a (random) process of reducing the intervals of uncertainty, the rate of data improvement being controlled, in effect, by the investment policy. A stationary dynamic model with infinite horizon of planning and with the criterion of total discounted costs is developed. The model is carefully investigated from the economic point of view, and some new effects are discovered. It is demonstrated that uncertainty may be the source of additional gain; the bigger the initial uncertainty, the bigger the gain may be under optimal control. This effect is based on PDI, the economic background of which is presented as multiplication of the expected gain over time, which is typical for the classical macromodels of economics.
Optimal continuous control is constructed at every time moment, and answers to two main questions are given:
(1) either to prolong R & D or to make ultimate selection of one project, (2) how to allocate resources among the rival projects in the case of R&D prolongation. The last question is answered on the basis of profitability indices that relate efficiencies of PDI for particular projects to the costs of information.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Aaker, D. A. and Tyebjee, T. T.: 1978, ‘A model for the selection of interdependent R&D projects’,IEEE Transactions on Engineering Management EM-25 (2).
Aase, K. K.: 1985, ‘R & D projects analyzed by semi-Martingale methods’,Journal of Applied Probability 22, 288–299.
Baker, N. R. and Freeland, J.: 1975, ‘Recent advances in R&D benefit measurement and project selection methods’,Management Science 10, 1164–1175.
Belenky, V. Z.: 1979, ‘Optimalnoye razvitije proisvodstva pri statsionarno rastushem sprose’,Economics and Mathematical Methods 4, 719–730 (in Russian).
Belenky, V. Z. and Belostotsky, A. M.: 1988, ‘Control of economic systems under the process of data improvement’,Journal of Economic Dynamics and Control 12 (4), 609–633. (Referred to as [B] herein).
Belenky, V. Z., Belostotsky, A. M., Avstryiskaya, T. P., and Birukova, E. S.: 1987, ‘Vibor s nepolnoy informasiey i otvetstvennost LPR. Poisson-Marnovsky process utochnenija’. In:Issledovanija po verojatnostnim problemam upravlenija ekonomicheskimy processami. Moscow, CEMI Acad. of Sci.
Chikte, S. D.: 1980, ‘Optimal sequential selection and resource allocation under uncertainty’,Advances in Applied Probability 14, 942–957.
Dantzig, G. B. and Madansky, A.: 1961, ‘On the solution of two-stage linear programs under uncertainty’,Proceeding, IV Berkeley Symposium on Mathematical Statistics and Probability. Berkeley: Univ. Calif. Press, Vol. I, pp. 165–176.
De Groot, M. H.: 1970,Optimal Statistical Decisions, McGraw-Hill Company, New York.
Deshmukh, S. D. and Chikte, S. D.: 1977, ‘Dynamic investment strategies for a risky R&D project’,Journal of Applied Probability 14, 144–152.
Henry, C.: 1974, ‘Investment decisions under uncertainty: the irreversibility effect’,The American Economic Review LXIV (6), 1006–1012.
Hess, S. W.: 1962, ‘A dynamic programming approach to R&D budgeting and project selection’,IRE Transactions on Engineering Management EM-9, 170–179.
Hurwicz, L.: 1951, ‘Optimality criteria for decision making under ignorance’, Cowles comission papers.
Iwai, K.: 1984, ‘Schumpeterian dynamics. An evolutionary model of innovation and imitation’,Journal of Economic Behavior and Organization 5, 159–190.
Jaglom, A. M. and Jaglom, I. M.: 1973,Verojatnost i informatsija. Moscow, Nauka (in Russian).
Lee, T. K.: 1985, ‘On the joint decisions of R&D and technology adoption’,Management Science 31, 959–969.
Lippman, S. A.: 1975, ‘On dynamic programming with unbounded rewards’,Management Science 21 (11), 1225–1233.
Luce, R. D. and Raiffa, H.: 1957,Games and Decisions. Introduction and Critical Survey, Wiley, New York.
Mansfield, E.: 1981, ‘How economists see R&D’,Harvard Business Review, Nov.–Dec., 98–106.
McCardle, K. F.: 1985, ‘Information acquisition and the adoption of new technology’,Management Science 31 (11), 1372–1389.
Nelson, R.: 1961, ‘Uncertainty, learning and the economics of parallel research and development efforts’,The Review of Economics and Statistics XLIII (4).
Presman, E. L. and Sonin, I. M.: 1982, ‘Posledovatelnoje upravlenije po nepolnim dannim, Moscow, Nauka (in Russian).
Samuelson, P. A.: 1955,Foundation of Economic Analysis, Cambridge (Mass), Harvard University Press.
Shevelev, Ja. V.: 1984, ‘O tsene informatsii v jadernoi energetike’,Atomnaja energia 57 (3), 200–208 (in Russian).
Smoljak, S. A.: 1984, ‘Ob odnom podhode k obosnovanija pravil sravnenija variantov hozjaistvenih meroprijatii v uslovijah neopredelennosti’, inModelirovanije v prosessah upravlenija norodnim hosjaistvom, Moscow, Nauka, pp. 151–154 (in Russian).
Stragovich, V. G.: 1981,Adaptivnoje upravlenije, Moscow, Nauka (in Russian).
Virtser, A. D. and Chernavsky, S. Ja.: 1973, ‘O poiske optimalnih strategii rasvitija ekonomicheskih sistem v uslovijah neopredelenoji ishodnoji informatsii’, inSistemni analiz i perspektivnoje planirovanije, Moscow, V.C. Academy of Sciences, pp. 209–217 (in Russian).
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Belenky, V.Z., Belostotsky, A.M. Resource allocation and project selection: Control of r & d under dynamic process of data improvement. Theor Decis 26, 1–35 (1989). https://doi.org/10.1007/BF00134054
Issue Date:
DOI: https://doi.org/10.1007/BF00134054