Investment and Exit Under Uncertainty with Utility from Anticipation

19 Pages Posted: 17 Sep 2018

See all articles by Jianjun Du

Jianjun Du

Shanghai University of Political Science and Law (SHUPL)

Jinqiang Yang

Shanghai University of Finance and Economics

Zhentao Zou

Wuhan University - Economics and Management School

Date Written: September 1, 2018

Abstract

This paper explores investment and exit decisions under uncertainty when the entrepreneur has anticipatory utility, which leads to the time‐inconsistency problem. Our model predicts that anticipatory utility has ambiguous effects on the investment strategy, which depends on the form of the project’s payoff. Under a lump‐sum payoff, an entrepreneur with anticipatory utility will under‐invest. However, she prefers over‐investing if the project delivers a flow payoff. Moreover, the model predicts that an entrepreneur with anticipatory utility is more reluctant to abandon an existing project. Finally, our model provides theoretical support and alternative explanation for the empirical evidence that people procrastinate to terminate projects from the perspective of time‐inconsistent preferences.

Suggested Citation

Du, Jianjun and Yang, Jinqiang and Zou, Zhentao, Investment and Exit Under Uncertainty with Utility from Anticipation (September 1, 2018). International Review of Finance, Vol. 18, Issue 3, pp. 359-377, 2018. Available at SSRN: https://ssrn.com/abstract=3244744 or http://dx.doi.org/10.1111/irfi.12154

Jianjun Du (Contact Author)

Shanghai University of Political Science and Law (SHUPL)

7989 Wai Qingsong Road
Shanghai, P.R 201701
China

Jinqiang Yang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, P.R.China, AK Shanghai 200433
China

Zhentao Zou

Wuhan University - Economics and Management School ( email )

Hubei
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1
Abstract Views
80
PlumX Metrics