Re: poly: Why interest rates may stay low

From: Robin Hanson <>
Date: Fri Feb 27 1998 - 16:44:47 PST

To elaborate on my earlier post, consider the idea of
a project to design a nanoassembler, and assume that some
investors looked at that project and decided that that
average rate of return for this project depended
on when the project started according to the following table:

Year Return
2000 -20%
2010 -10%
2020 0%
2025 5%
2030 10%
2040 20%
2050 25%
2060 30%
2070 30%

Assume the interest rate remains at 5% over this time,
and for simplicity assume with competing teams the team that
starts first is almost sure to get the rewards.

With property rights on the right to start this project,
it might get started in 2050, which might maximize the
present value of this property right (note that a lower
return rate that happens earlier can give a better
present value).

Without property rights, the project should get started
by one team in 2025, when the return equaled the interest
rate, making the present value of the project zero.
Given our assumption of first in wins, it would be a net
loss for another team to try as well.

Now if there are externalities from this project, the ideal
social date for the project to start may well be earlier than
2050. But whether it is before or after 2025 is hard to say.

If there is disagreement among investors, with most putting the
break-even date after 2025, but one putting it at 2025, and
another putting it before 2025, then this last team should do
the project just before 2025. The variation in expectations
that Perry draws our attention to only makes project happen
even earlier.

Did this make things clearer Hal?

Robin Hanson
RWJF Health Policy Scholar, Sch. of Public Health 510-643-1884
140 Warren Hall, UC Berkeley, CA 94720-7360 FAX: 510-643-8614
Received on Sat Feb 28 00:49:45 1998

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