Kevin F. McCardle, Ilia Tsetlin, Robert L. Winkler
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 this 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, with the rate of arrival of project failure, and with the prior probability that the project can be successfully completed. The optimal stopping time decreases with the rates of new project arrival and project completion. © 2018 INFORMS.
UCLA Anderson School of Management, University of California, Los Angeles, Los Angeles, 90095, CA, United States; INSEAD Singapore, Singapore, 138676, Singapore; Fuqua School of Business, Duke University, Durham, 27708, NC, United States
