The Link between Short-Termism and Risk: Barriers to Investment in Long-Term Projects

51 Pages Posted: 1 Apr 2020 Last revised: 25 Nov 2020

See all articles by Boyan Yanovski

Boyan Yanovski

Potsdam Institute for Climate Impact Research

Kai Lessmann

Potsdam Institute of Climate Impact Research

Ibrahim Tahri

The New School - Department of Economics

Date Written: March 7, 2020

Abstract

We study how investments that require long-term financial commitments are affected by undiversifiable, uninsurable risk in the economic environment in the context of investor preferences characterized by decreasing absolute risk aversion and a desire for consumption smoothing. In our setting, if funds are committed long-term, they become unavailable in the short-term resulting in an increased exposure to shocks before maturity of the investment. Coupled with decreasing absolute risk aversion, this leads to an endogenous discounting of long-term projects. High perceived risk in the economic environment leads to low levels of long-term investment (short-termism). We also explore policy measures that can support long-term investment, in particular, during times of increased uncertainty.

Keywords: short-termism, discounting, systematic risk, decreasing absolute risk-aversion, long-term projects, illiquid assets, optimal portfolio

JEL Classification: G11

Suggested Citation

Yanovski, Boyan and Lessmann, Kai and Tahri, Ibrahim, The Link between Short-Termism and Risk: Barriers to Investment in Long-Term Projects (March 7, 2020). Available at SSRN: https://ssrn.com/abstract=3550501 or http://dx.doi.org/10.2139/ssrn.3550501

Boyan Yanovski (Contact Author)

Potsdam Institute for Climate Impact Research ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Kai Lessmann

Potsdam Institute of Climate Impact Research ( email )

HOME PAGE: http://https://pik-potsdam.de/members/lessmann

Ibrahim Tahri

The New School - Department of Economics ( email )

Room 1116
6 East 16th Street
New York, NY 10003
United States

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