Optimal expenditure patterns for risky R&D projects with time-dependent returns

The basic Lucas model for risky R&D projects is revisited. New solutions for optimal expenditures are explored by exploiting the merits of the theory of differential equations. After applying the calculus of variations, a nonlinear differential equation is presented whose solution provides the optimal control for a constant conditional-completion density function and different time-dependent return models. New, exact, and approximate solutions are presented and discussed. It is found, for the class of risky R&D projects under study, that the behavior over time of the optimal expenditure is functionally similar to that of the expected return.     

The process of technology evolution : Multitechnology innovations as the driving force

Technological innovations are the substance of technology and the drivers of its evolution. This process was studied by analyzing the US patent data base, getting information on types of innovation and on their trends.It was found that the evolution of a technology depends upon its annexing multitechnology innovations. Ascending technologies utilize wide-range innovations, while mature technologies utilize narrow-range innovations. The findings are summed up in a model that shows the life cycle of a technology, from emergence to maturity.The model can be applied at a laboratory level, at a firm strategy level, as well as at the national level. Some examples are presented to illustrate applications.     

Knowledge centres: A technology & engineering hybrid

A Knowledge Centre is defined as a group of experts in a specific field, with some designated equipment and software.
Such groups were recognized for the first time (in a given matrix organization) as the real carriers of the accumulated knowledge of science and technology disciplines.
To be reckoned as a knowledge centre (K.C.), the group has to be ready to participate in development projects, as well as to lead research for improved technologies and advance knowledge in its field.
It was found that by nurturing knowledge centres, the organization has succeeded in per-forming an interdisciplinary R&D while at the same time maintaining and advancing a strong technology base. The K.C. has some distinctive lifecycle phases. Consequently, the organization applies different considerations and different planning and control methods for each phase. An emerging K.C. needs sensitive care and support. A mature K.C. calls for firm guidance and control, a declining K.C. should be directed to another field, or be dismantled.
This report also describes some of the procedures employed by the organization to maintain and control its K.C.s, and a management attempt to use them as a tool for managing the advancement of technology within the organization. The authors predict that a system of K.C.s may be defined and serve other R&D laboratories in a similar way. This thesis has to be verified by additional studies. Some additional areas for further research are identified, too.     

The design of internal control and capital structure

We study the design of internal control and capital structure.We pose the question, When is control allocated only to shareholdersand when is it allocated to other stakeholders, such as debtholders,or the management team? We show that shareholders (debtholders)get control when the firm's cash flow is relatively sensitive(insensitive) to managerial effort. Our theory implies thatthe signs of the correlations between endogenous variables whenshareholders have absolute control are reversed when debtholdershave veto power. In particular, debt level and firm value arenegatively (positively) correlated when debtholders have vetopower (shareholders have absolute control).     

Capital and ownership structures, and the market for corporate control

I analyze optimal capital and ownership structures as resultingfrom anticipated future control contests. I focus on leverageas a device that enables the incumbent management to extractthe maximum value from the rival. I show that firm value dependson both capital and ownership structures. The analysis leadsto the following predictions: (i) more efficient managers useless debt, (ii) firms facing better rivals for control issuemore debt, and (iii) firms with supermajority rules issue lessdebt. Several predictions are consistent with known empiricalregularities.     

Optimal bankruptcy laws across different economic systems

We model fundamental differences across economic systems andpropose optimal bankruptcy laws. We show that creditor-debtorrelationships in a given economy are affected by the abilityof creditors to obtain information about fundamentals and themanagers' ability to strategically use their private information.An optimal bankruptcy law utilizes creditors' information whileminimizing managers' use of strategic information. Our proposedlaws for a developed bank-based system like Germany includea creditor chapter only, for a developed market-based systemlike the United States include both a creditor chapter and adebtor chapter, and for an underdeveloped system include botha creditor chapter and a debtor chapter that gives the managermore protection than in a market-based system.     

Environmental participation in the U.S. sulfur allowance auctions

The 1990 Clean Air Act established a sulfur emissions-trading program among utilities. This was the first large scale adoption of this type of emissions-trading program and the program’s success has attracted international attention. An interesting aspect of this program is that in addition to trades among the polluting firms and brokers or investors, individuals and groups have been participants, buying allowances to retire them and reduce sulfur emissions. This provides a relatively unique way to examine the “willingness to pay” for further reductions of sulfur emissions. I examine environmental participation in the sulfur allowances market, focusing on the Environmental Protection Agency (EPA) allowance auctions which have been conducted annually since 1993. The existence of groups purchasing these allowances in order to retire them suggests that the overall cap on sulfur emissions may be higher than the optimal emissions level. The marginal benefits from the first ton of emissions reduction appear to be significantly larger than marginal abatement costs. Total spending to retire sulfur emissions allowances, while small in relation to the total market, is sizeable in terms of the alternate purchases these groups and individuals could have made.