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Investment timing with information-processing constraints

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  • Mu, Congming
  • Yang, Jinqiang
  • Zhang, Yuhua

Abstract

This paper investigates the implications of information-processing constraints (rational inattention) for the optimal investment timing and the corresponding value loss based on the real option framework with incomplete information. We find that an agent with rational inattention tends to overinvest and that the loss in option value decreases in the information channel capacity.

Suggested Citation

  • Mu, Congming & Yang, Jinqiang & Zhang, Yuhua, 2020. "Investment timing with information-processing constraints," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s154461231830607x
    DOI: 10.1016/j.frl.2019.01.001
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    References listed on IDEAS

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    1. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    2. Peng, Lin, 2005. "Learning with Information Capacity Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 307-329, June.
    3. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. Shibata, Takashi, 2008. "The impacts of uncertainties in a real options model under incomplete information," European Journal of Operational Research, Elsevier, vol. 187(3), pages 1368-1379, June.
    6. Luo, Yulei & Nie, Jun & Wang, Gaowang & Young, Eric R., 2017. "Rational inattention and the dynamics of consumption and wealth in general equilibrium," Journal of Economic Theory, Elsevier, vol. 172(C), pages 55-87.
    7. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    8. Ricardo Reis, 2011. "When Should Policymakers Make Announcements?," 2011 Meeting Papers 122, Society for Economic Dynamics.
    9. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    10. Kenneth Kasa, 2006. "Robustness and Information Processing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 1-33, January.
    11. Luo, Yulei & Young, Eric R., 2010. "Asset pricing under information-processing constraints," Economics Letters, Elsevier, vol. 107(1), pages 26-29, April.
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    Cited by:

    1. Zhang, Yuhua & Niu, Yingjie & Wu, Ting, 2020. "Stochastic interest rates under rational inattention," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Zhang, Yuhua & Mu, Congming, 2021. "Optimal ownership of entrepreneurial firms with rational inattention," Economics Letters, Elsevier, vol. 209(C).

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    More about this item

    Keywords

    Real options; Optimal investment; Information-processing constraints; Channel capacity;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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