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Resource allocation when projects have ranges of increasing returns

  • Catherine Bobtcheff
  • Christian Gollier
  • Richard Zeckhauser
Article
  • 124 Downloads

Abstract

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.

Keywords

Capital allocation Increasing returns Probabilistic returns Egalitarian allocation Complete specialization 

JEL Classification

D24 C60 D84 

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Catherine Bobtcheff
    • 1
  • Christian Gollier
    • 2
  • Richard Zeckhauser
    • 3
  1. 1.Toulouse School of Economics (LERNA and CNRS)ToulouseFrance
  2. 2.Toulouse School of Economics (LERNA and IDEI)ToulouseFrance
  3. 3.Harvard UniversityCambridgeUSA

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