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Investment and Exit under Uncertainty with Utility from Anticipation

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  • Jianjun Du
  • Jinqiang Yang
  • Zhentao Zou

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

  • Jianjun Du & Jinqiang Yang & Zhentao Zou, 2018. "Investment and Exit under Uncertainty with Utility from Anticipation," International Review of Finance, International Review of Finance Ltd., vol. 18(3), pages 359-377, September.
    • Handle: RePEc:bla:irvfin:v:18:y:2018:i:3:p:359-377
    DOI: 10.1111/irfi.12154
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    Cited by:

    1. Wu, Ting & He, Linfeng & Zhang, Fan, 2021. "Endogenous discounting, investment and Tobin’s q," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).

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