When Can Cost-Reducing R&D be Justified--A Simple Explanatory Model
Abstract
An important class of expensive and lengthy R&D projects seeks to reduce the subsequent costs of operating systems. Some energy R&D projects are of this kind. Despite the confident assertions of technologists that the R&D undertaken will produce a large technological advance, and hence a given large amount of system operating cost reduction at a later time, it can often be economically much wiser, even when the large technological advance is achievable, to aim deliberately for a far lesser technological advance--if this lesser objective is attainable earlier and at lower R&D cost. This result is intuitively plausible if one accepts discounting, or the fact that there is a time preference for money. That is, a dollar available this year has more value to us than a dollar available next year--an observation which is trivial, but nevertheless is sometimes ignored or dismissed by, or seems unfamiliar to, advocates of particular R&D projects. To make this notion quantitative, and the possible tradeoffs more easily discernible, generally requires that many parameters and parameter interactions be accounted for in systematic exploration of discounting questions, even in the simplest reasonable models of cost- reducing R&D. Such a very simple model is developed in this paper. Enough detail is provided so that readers can trace through for themselves examples which may particularly interest them. (Author)
Document Details
- Document Type
- Technical Report
- Publication Date
- Sep 01, 1979
- Accession Number
- ADA090782
Entities
People
- Bruno W. Augenstein
Organizations
- RAND Corporation