Monday, February 29, 2016

When to Abandon a Research Project and Search for a New One

McCARDLE Kevin ; TSETLIN Ilia,WINKLER Robert L.
Read the working paper
INSEAD Working Paper 2016/10/DSC 

We investigate the cost of the opportunity delayed by working on one project with uncertain success rather than searching for a new project. We answer the question: how long should a firm work on a research project with uncertain success before abandoning it if the only alternative is to search for a new project to work on? Rather than treating the opportunity as an exogenous alternative, this approach endogenizes the opportunity value and the attendant cost of its delay. We consider cases with both a finite and an infinite number of potential projects. We derive the optimal stopping time and show that it increases with the discount rate and with the prior probability that the project can be successfully completed, and it decreases with the rates of new project arrival and project completion.