Production and Anticipatory Hedging Under Time-Inconsistent Preferences
Journal of Futures Markets, Forthcoming
Posted: 10 Feb 2014 Last revised: 5 Jan 2015
Date Written: August 24, 2014
This paper analyzes the production and hedging decisions of a competitive firm under price uncertainty and time-inconsistent preferences. We show that the firm would over-hedge and the output choice would be affected by the firm's preferences and the price distribution, thereby identifying a novel circumstance under which the full-hedge theorem and the separation theorem may fail. Furthermore, when the firm can hedge at the same time as production or ahead of production, ex ante firm value is higher in the former case, suggesting that planning ahead for price risk may backfire in the presence of time-inconsistent preferences.
Keywords: Hyperbolic Discounting, Anticipatory Hedging Timing, Futures, Options
JEL Classification: D92, G02, G32
Suggested Citation: Suggested Citation