Optimal funding policy for R and D projects aimed at cost reduction: The case of a new drug in psychiatry

Governments' role in supporting research developments is well established. In this paper we describe a model for finding the optimal funding path for R and D projects aimed at cost reduction. A numerical illustration for a case of pharmaceutical research for a new drug to reduce the cost of treating patients in an irreversible chronic condition (schizophrenia) is presented. This is done by using the mathematical results obtained for the special case—the stationary exponential case. The sensitivity analysis method is utilized to study the optimal spending path and the project's discounted expected value. We also present a possible alternative subjective consistent estimation procedure for finding the optimal funding path for such projects.