Direct and Spillover Effects of ATP-Funded Photonics Technologies

subtracted the opportunity value of those employees doing other things (varying from 65–85percent), and subtracted what might have been the U.S. share (varying from 20–50 percent).Given the employment trends in Figure 6, and assuming Displaytech continues to employ atleast 50 people through 2006, then adjusting for technology-sector wage inflation, using theOffice of Management and Budget’s (OMB) statutory social discount rate of 7 percent, andnetting out the $1.75 million ATP grant, we estimate the net present value (NPV) of thedifference over the period 1995–2006 between Displaytech with and without ATP as $1.85million (2005 dollars), our best-guess scenario point estimate. The OMB’s 7 percent comesfrom the historical average return for private investments. However, there is compellingtheoretic support (e.g., Caplin and Leahy, 2004) that social planners should use lowerdiscount rates than private returns. Indeed, the United Kingdom (HM Treasury, 2003)standard is 3.5 percent in evaluations for time periods up to 30 years, and lower rates foreven longer periods. So, we also explored two alternative social discount rates. At a 5 percentsocial discount rate, the best-guess scenario NPV is $2.36 million, and at 3 percent it rises to$4.04 million.Discount rate notwithstanding, if we count only this employment effect, this represents adecent, though not spectacular, 19.4 percent internal rate of return (IRR) from the ATPinvestment and discounted benefit to cost ratios ranging from 1.79 to 2.25. (Note that thesevalues are only for the direct economic effects on Displaytech, its employees, and competitorsand do not include direct effects on downstream consumers or indirect knowledge spillovereffects outside of the market.) Our NPV estimate of the direct employment compensationeffect ranges from -$1.03 million in the worst-case scenario at the 7 percent discount rate to$8.51 million in the best-case scenario at the 3 percent discount rate. Assuming simpletriangular probability functions on the low, best-guess, and high values for the variousparameters, we used Monte Carlo simulation to generate probability distributions, shown inFigure 7, for the additive value of the ATP award. The award has positive net value to thenation in more than 98 percent of the Monte Carlo variations under each of the threediscount rates, with mean values of $1.63 million at 7 percent, $2.17 million at 5 percentand $2.66 million at 3 percent. The internal rate of return averaged about 18 percent. Thesefigures for employment compensation are less speculative than the estimates that follow forthe consumer surplus and knowledge spillover effects, and, as such, they represent a mostconservative set of estimates.CONSUMER SURPLUSFor the impact of Displaytech on consumer surplus in the market, as indicated by the uppershaded region in Figure 5, we estimate the net increase in the value of sales, accounting forpotential price and quantity effects to consumers and competitors and for some displacedsales volume from U.S.-based competitors.In the current main application of Displaytech microdisplays, viewfinders, the advantagesof their specific ferroelectric liquid crystal technology are not yet enabling anything thatalternative microdisplay approaches cannot. As one impartial industry observer weinterviewed put it, the performance difference for the end users from FLC in viewfindersDisplaytech 29