Journal of Productivity Analysis

, Volume 1, Issue 3, pp 193–228 | Cite as

The effect of defense program uncertainty on cost, schedule, and capital investment

  • Norman Keith Womer
  • Katsuaki Terasawa


Program instability, low levels of capital investment and uneconomical production rates have been recognized as significant problems in defense acquisition programs. In this paper, we use a dynamic programming model under uncertainty to investigate the relations among these problems. We show that capital investment and production rates that appear to be too low may be the result of cost minimizing responses by contractors to program instability. Attempts to change the level of capital investment or production rate on defense programs without regard to the nature of program instability may hinder efficient resource allocation.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Able, A.B. 1983. Optimal Investment under Uncertainty. American Economic Review, 73:228–233.Google Scholar
  2. Bemis, J.C. 1981. A Model for Examining the Cost Implications of Production Rate. Concepts: The Journal of Defense Systems Acquisitions Management 84–94.Google Scholar
  3. Borsting, J.R. 1982. Decision-Making at the Top. Management Science, 28:341–351.Google Scholar
  4. Boyd, D.W., R.L. Phillips and S.G. Regulinski. 1982. A Model of Technology Selection by Cost Minimizing Producers. Management Science, 28:418–424.Google Scholar
  5. Cottle, R.L. and M.S. Wallace. 1983. Economic Effects of Non-Binding Constraints. Journal of Industrial Economics, 31:469–477.Google Scholar
  6. Cox, L.W. and J.S. Gansler. 1981. Evaluating the Impact of Quantity, Rate, and Competition. Concepts: The Journal of Defense Systems Acquisition Management, 29–53.Google Scholar
  7. Department of Defense, Final Report of the Task Force on Acquisition Improvement, Washington, D.C.: The Department of Defense, December 23, 1981.Google Scholar
  8. Dietrich, J. K., and D.G. Heckerman. 1980. Uncertain Inflation and the Demand for Capital. Economic Inquiry, 18:461–471.Google Scholar
  9. Fisher, I.N. and G.R. Hall. 1967. Risk and the Aerospace Rate of Return. Rank Memorandum RM-5440-PR. Santa Monica, California: The Rand Corporation, December.Google Scholar
  10. Frisch, F.A.P. and D.D. Acher. 1981. Financing Defense Systems Programs, Concepts: The Journal of Defense Systems Acquisition Management, 4:7–28.Google Scholar
  11. General Accounting Office, Budget Reductions for FY1986: Balanced Budget and Emergency Deficit Control Act of 1985, (Report GAO/OCG-86–1), Washington, D.C.: The General Accounting Office, January 21, 1986.Google Scholar
  12. Gulledge, T.R., N.K. Womer and M.M. Tarimicilar. 1985. A Discrete Dynamic Optimization Model for Made-to-Order Cost Analysis. Decision Sciences, 16:73–90.Google Scholar
  13. Gulledge, T.R. and N.K. Womer. 1986. The Economics of Made-to-Order Production, Berlin: Springer-Verlag.Google Scholar
  14. Hartman, R. 1972. The Effects of Price and Cost Uncertainty on Investment. Journal of Economic Theory, 5:258–266.Google Scholar
  15. Hillier, R.S. and J.F. Shapiro. 1986. Optimal Capacity Expansion Planning When There Are Learning Effects. Management Science, 32:1153–1163.Google Scholar
  16. Large, J.P. and K.M.S. Gillespie. 1977. A Critique of Aircraft Airframe Cost Models. Rand Report R-2194-AF. Santa Monica, California: The Rand Corporation, September.Google Scholar
  17. Muth, J.F. 1986. Search Theory and the Manufacturing Progress Function. Management Science, 32:948–962.Google Scholar
  18. Smith, L.L. 1976. An Investigation of Changes in Direct Labor Requirements Resulting from Changes in Airframe Production Rate. Ph.D. Thesis, University of Oregon, Eugene, Oregon.Google Scholar
  19. Terasawa, K., J. Quirk, and N. K. Womer. 1989. Turbulence, Cost Escalation, and Capital Intensity Bias in Defense Contracting. Cost Analysis Applications of Economics and Operations Research, T. R. Gulledge and L. A. Litteral, ed., Berlin: Springer-Verlag, 97–116.Google Scholar
  20. Weidenbaum, M.L. 1967. The Military/Space Market: Intersection of the Public and Private Sectors. Department of Economics Working Paper 6712 (Washington University: St. Louis).Google Scholar
  21. Womer, N.K. 1984. Estimating Learning Curves from Aggregate Monthly Data. Management Science, 30:982–992.Google Scholar

Copyright information

© Kluwer Academic Publishers 1989

Authors and Affiliations

  • Norman Keith Womer
    • 1
  • Katsuaki Terasawa
    • 2
  1. 1.Department of Economics & FinanceUniversity of Mississippi, UniversityUSA
  2. 2.Department of Administrative SciencesNaval Postgraduate SchoolMonterey

Personalised recommendations