Time Preference and the Life Cycle: The Logic of Long-Term High Risk vs. Short-Term Low Risk Investment

3019 23 3074 3 6093 document 3074 WP-87-033.pdf application/pdf 0aa0fd4676537989a4e2d32072db2b09 MD5 1019218 2016-01-15 01:58:13 https://pure.iiasa.ac.at/id/eprint/3019/1/WP-87-033.pdf 3019 1 1 text en public

WP-87-033.pdf

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WP-87-033.pdf

http://eprints.org/relation/isVersionOf https://pure.iiasa.ac.at/id/document/3074 http://eprints.org/relation/isVolatileVersionOf https://pure.iiasa.ac.at/id/document/3074 http://eprints.org/relation/isCoversheetVersionOf https://pure.iiasa.ac.at/id/document/3074 archive 351 disk0/00/00/30/19 2016-01-15 01:58:13 2021-08-27 17:13:04 2016-01-15 01:58:13 monograph show 2 Ayres R.U. 1324 Mori S. AL1017 Time Preference and the Life Cycle: The Logic of Long-Term High Risk vs. Short-Term Low Risk Investment pub iis_ecn iis_mod iis_mnt prog_tes This paper argues that time-preference functions (or "discount rates") for R&D should properly be considered to be functions of the economic environment. In particular, during periods of accelerating growth and general increasing prosperity it is appropriate and rational to prefer a marginal dollar in the present to a marginal dollar in the future. Conversely, during periods of saturating growth and deteriorating prospects, the converse holds: it is rational to prefer a marginal dollar in the future to one in the present. Periods of increasing general prosperity -- rising tide -- are likely to be associated with the early phases of an industry "life cycle". Periods of declining prosperity, by contrast, may occur towards the end of the life cycle. The implications for R&D policy are derived in terms of a simple model. The results suggest that at the beginning of the life cycle the optimal R&D policy is to invest in short-term, low risk ventures (i.e. product or process improvements). Late in the cycle, however, the optimal policy reverses to long-term high-risk projects. In simple terms: a firm in a declining industry needs to find a new product or business to replace the old one. Unfortunately, the appropriate behavior is discouraged by most existing B/C methodologies. 1987-04 published WP-87-033 WP-87-033 10 1136 2208 public working_paper IIASA, Laxenburg, Austria 47 FALSE info:eu-repo/semantics/book