Entry Mistakes, Entrepreneurial Boldness and Optimism
AbstractWe analyze the investment decision of a population of time inconsistent entrepreneurs who overweight current payoffs relative to future returns. We show that, in order to avoid inefficient procrastination, agents may find it optimal to keep optimistic priors about their chances of success and 'blindly invest'. This explains entrepreneurial boldness and entry mistakes (or an excessive level of investment in the economy) without assuming the existence of boundedly rational, 'intrinsically optimistic' managers. We also prove that: (i) there is a negative correlation between the risk free rate and theproportion of bold entrepreneurs in the economy, (ii) realist and bold agents can coexist and achieve the same payoff and (iii) entrepreneurs with highest ability are most likely to keep optimistic prospects and make entry mistakes.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2213.
Date of creation: Aug 1999
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- A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- G39 - Financial Economics - - Corporate Finance and Governance - - - Other
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