Strategic Technology Adoption and Hedging under Incomplete Markets
53 Pages Posted: 18 Oct 2014 Last revised: 6 Jan 2015
Date Written: November 5, 2014
We investigate the implications of technological innovation and non-diversifiable risk on entrepreneurial entry and optimal portfolio choice. In a real options model where two risk-averse individuals strategically decide on technology adoption, we show that the impact of non-diversifiable risk on the option timing decision is ambiguous and depends on the frequency of technological change. Compared to the complete market case, non-diversifiable risk may accelerate or delay the optimal investment decision. Moreover, strategic considerations regarding technology adoption play a central role for the entrepreneur's optimal portfolio choice in the presence of non-diversifiable risk.
Keywords: Real Options; Incomplete Markets; Technology Adoption; Optimal Portfolio Choice; Hedging
JEL Classification: G11; G31; E02
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