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R&D investment under time-inconsistent preferences

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  • Hu, Fan
  • Zhang, Fan
  • Zou, Zhentao

Abstract

We extend the real options model of R&D by incorporating time-inconsistent preferences. We show that time-inconsistent preferences can lead to both under-investment and over-investment in R&D, which depends on the magnitude of technological uncertainty. When the technological uncertainty is low, the sophisticated entrepreneurs exercise earlier than the time-consistent entrepreneur. However, the sophisticated entrepreneurs invest later when the technological uncertainty is high.

Suggested Citation

  • Hu, Fan & Zhang, Fan & Zou, Zhentao, 2020. "R&D investment under time-inconsistent preferences," Economics Letters, Elsevier, vol. 197(C).
    • Handle: RePEc:eee:ecolet:v:197:y:2020:i:c:s0165176520303803
    DOI: 10.1016/j.econlet.2020.109620
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    References listed on IDEAS

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    1. Grenadier, Steven R. & Wang, Neng, 2007. "Investment under uncertainty and time-inconsistent preferences," Journal of Financial Economics, Elsevier, vol. 84(1), pages 2-39, April.
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    Cited by:

    1. Evans Opoku-Mensah & Yuming Yin & Bismark Addai, 2021. "Do Mature Firms Gain Higher Economic Value from R&D Investment?," Journal of Industry, Competition and Trade, Springer, vol. 21(2), pages 211-223, June.
    2. Bian, Yuxiang & Chen, Lin & Xiong, Xiong & Yang, Jinqiang, 2023. "Private equity valuation under time-inconsistent preferences," Research in International Business and Finance, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    R&D investment; Time-inconsistent preferences; Technological uncertainty;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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