Sequential development of correlated projects: An application to coal liquefaction

Abstract

In this paper, a sequential research and development programme is considered for which several categories of related technologies are available to develop, each having the potential to produce some final product. At each stage of the programme, an optimal portfolio of technologies is chosen, given the information acquired from the previous stages, and those contingent optimal plans are followed in all subsequent stages. The model is applied to coal liquefaction technologies to emphasize the costs that may be incurred by erroneously approaching the development programme as a once-and-for-all endeavour rather than in a sequential framework. The results of the synthetic oil application indicate that the acceleration of the programme may be optimal when the probability of successful development decreases. Under these conditions, adoption of a ‘crash programme’ in which all projects are researched simultaneously, may lead to deferral of synthetic oil development.