nep-ppm New Economics Papers
on Project, Program and Portfolio Management
Issue of 2010‒03‒06
four papers chosen by
Arvi Kuura
Parnu College - Tartu University

  1. Is Specialization Desirable in Committee Decision Making? By Ruth Ben-Yashar; Winston Koh; Shmuel Nitzan
  2. Average Internal Rate of Return and investment decisions: A new perspective By Carlo Alberto Magni
  3. The Financing of R&D and Innovation By Hall, Bronwyn H.; Lerner, Josh

  1. By: Ruth Ben-Yashar (Department of Economics, Bar Ilan University); Winston Koh (Singapore Management University); Shmuel Nitzan (Department of Economics, Bar Ilan University)
    Abstract: Committee decision making is examined in this study focusing on the role assigned to the committee members. In particular, we are concerned about the comparison between committee performance under specialization and non-specialization of the decision makers.
    Keywords: framing, project selection, public policy, collective decision making, committee, uncertain dichotomous choice, specialization, simple majority rule
    JEL: D81 D71
    Date: 2009–06
  2. By: Carlo Alberto Magni
    Abstract: The internal rate of return (IRR) is often used by managers and practitioners for investment decisions. Unfortunately, it has serious flaws: (i) multiple real-valued IRRs may arise, (ii) complex-valued IRRs may arise, (iii) the IRR is, in general, incompatible with the net present value (NPV) in accept/reject decisions (iv) the IRR ranking is, in general, different from the NPV ranking, (v) the IRR criterion is not applicable with variable costs of capital. The efforts of economists and management scientists in providing a reliable project rate of return have generated over the decades an immense bulk of contributions aiming to solve these shortcomings. This paper offers a complete solution to this long-standing issue by changing the usual perspective: the IRR equation is dismissed and the evaluator is allowed to describe the project as an investment or a borrowing at his discretion. This permits to show that any arithmetic mean of the one-period return rates implicit in a project reliably informs about a project’s profitability and correctly ranks competing projects. With such a measure, which we name ”Average Internal Rate of Return”, complex-valued numbers disappear and all the above mentioned problems are wiped out. The economic meaning is compelling: it is the project return rate implicitly determined by the market. The traditional IRR notion may be found back as a particular case.
    Keywords: Decision analysis; investment criteria; capital budgeting; internal rate of return; investment stream; market rate; mean
    JEL: M41 G11 G12 G31 D81 M52
    Date: 2010–02
  3. By: Hall, Bronwyn H. (UNU-MERIT, Maastricht University, Institute of Fiscal Studies, University of California-Berkeley, and NBER); Lerner, Josh (Harvard Business School, and NBER)
    Abstract: Evidence on the "funding gap" for investment innovation is surveyed. The focus is on financial market reasons for underinvestment that exist even when externality-induced underinvestment is absent. We conclude that while small and new innovative firms experience high costs of capital that are only partly mitigated by the presence of venture capital, the evidence for high costs of R&D capital for large firms is mixed. Neverthless, large established firms do appear to prefer internal funds for financing such investments and they manage their cash flow to ensure this. Evidence shows that there are limits to venture capital as a solution to the funding gap, especially in countries where public equity markets for VC exit are not highly developed. We conclude by suggesting areas for further research.
    Keywords: innovation, R&D, financing, liquidity constraints, venture capital, cash flow
    JEL: G24 G32 O32 O38
    Date: 2010
  4. By: Ana-Isabel Guerra; Ferran Sancho
    Abstract: We show that standard expenditure multipliers capture economy-wide effects of new government projects only when financing constraints are not binding. In actual policy making, however, new projects usually need financing. Under liquidity constraints, new projects are subject to two opposite effects: an income effect and a set of spending substitution effects. The former is the traditional, unrestricted, multiplier effect; the latter is the result of expenditure reallocation to upheld effective financing constraints. Unrestricted multipliers will therefore be, as a general rule, upward biased and policy designs based upon them should be reassessed in the light of the countervailing substitution effects.
    Keywords: Government multipliers, fiscal stimulus, expenditures substitution effects
    JEL: H61 C67
    Date: 2010–02–22

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