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Abstract

This paper analyzes an agent¡¯s option exercise decision under uncertainty. The agent decides whether and when to do an irreversible activity. He is tempted by immediate gratification and suffers from self-control problems. This paper adopts the Gul and Pensendorfer self- control utility model. Unlike the time inconsistent hyperbolic discounting model, it provides an explanation of procrastination and preproperation based on time consistency. When applied to the investment and exit problems, it is shown that (i) if the project value is immediate, an investor may invest in negative NPV projects; (ii) if the production cost is immediate, a firm may exit even if it makes positive net profits; and (iii) if both rewards and costs are immediate, an agent may simply follow the myopic rule which compares only the current period benefit and cost.

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File URL: http://128.118.178.162/eps/mic/papers/0409/0409002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 0409002.

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Length: 30 pages
Date of creation: 11 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpmi:0409002

Note: Type of Document - pdf; pages: 30
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Web page: http://128.118.178.162

Related research

Keywords: self-control; temptation; procrastination; preproperation; option value;

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Find related papers by JEL classification:

• D1 - Microeconomics - - Household Behavior
• D2 - Microeconomics - - Production and Organizations
• D3 - Microeconomics - - Distribution
• D4 - Microeconomics - - Market Structure and Pricing

References

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1. Krusell, Per & Kuruscu, Burhanettin & Smith, Anthony Jr., 2002. "Time orientation and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 107-135, January.
   
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2. Per Krusell & Anthony A. Smith, Jr., . "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers 2001-05, Carnegie Mellon University, Tepper School of Business.
   
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   • Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," NajEcon Working Paper Reviews 625018000000000251, www.najecon.org.
   • Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," Levine's Working Paper Archive 625018000000000251, David K. Levine.
   • Krusell, Per & Smith Jr., Anthony A, 2001. "Consumption-Savings Decisions with Quasi-Geometric Discounting," CEPR Discussion Papers 2651, C.E.P.R. Discussion Papers.
3. Esteban, Susanna & Miyagawa, Eiichi & Shum, Matthew, 2007. "Nonlinear pricing with self-control preferences," Journal of Economic Theory, Elsevier, vol. 135(1), pages 306-338, July.
   
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   • Shum, Matthew & Esteban, Susanna & Miyagawa, Eiichi, . "Nonlinear Pricing with Self-Control Preferences," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4995, Universidad Carlos III de Madrid.
   • Susanna Esteban & Eiichi Miyagawa & Matthew Shum, 2003. "Nonlinear Pricing with Self-Control Preferences," Discussion Papers 0304-03, Columbia University, Department of Economics.
   • Esteban, Susanna & Miyagawa, Eiichi & Shum, Matthew, 2003. "Nonlinear Pricing with Self-Control Preferences," Working Papers 10-03-1, Pennsylvania State University, Department of Economics.
4. Grenadier, Steven R. & Wang, Neng, 2005. "Investment under Uncertainty and Time-Inconsistent Preferences," Research Papers 1899, Stanford University, Graduate School of Business.
   
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6. David K. Levine & Drew Fudenberg, 2006. "A Dual-Self Model of Impulse Control," American Economic Review, American Economic Association, vol. 96(5), pages 1449-1476, December.
   
   • Fudenberg, Drew & Levine, David, 2006. "A Dual-Self Model of Impulse Control," Scholarly Articles 3196335, Harvard University Department of Economics.
   • Drew Fudenberg & David K. Levine, 2004. "A Dual Self Model of Impulse Control," Harvard Institute of Economic Research Working Papers 2049, Harvard - Institute of Economic Research.
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7. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2003. "Time-Inconsistent Preferences And Social Security," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 745-784, May.
   
   • Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2000. "Time inconsistent preferences and Social Security," Discussion Paper / Institute for Empirical Macroeconomics 136, Federal Reserve Bank of Minneapolis.
8. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
   
   • Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
9. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
   
   • Ted O'Donoghue & Matthew Rabin, 2001. "Choice And Procrastination," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 121-160, February.
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10. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000. "Temptation and Taxation," GSIA Working Papers 2001-12, Carnegie Mellon University, Tepper School of Business.
    
    • Per Krusell & Burhanettin Kuruşçu & Anthony A. Smith Jr., 2010. "Temptation and Taxation," Econometrica, Econometric Society, vol. 78(6), pages 2063-2084, November.
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    • W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers 99f2, Economics Department, Princeton University.
12. Brocas, Isabelle & Carrillo, Juan D, 2001. " Rush and Procrastination under Hyperbolic Discounting and Interdependent Activities," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 141-64, March.
13. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
14. Stefano DellaVigna & M. Daniele Paserman, 2004. "Job Search and Impatience," NBER Working Papers 10837, National Bureau of Economic Research, Inc.
    
    • Stefano DellaVigna & M. Daniele Paserman, 2005. "Job Search and Impatience," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 527-588, July.
15. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
    
    • Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
16. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
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18. Brocas, Isabelle & Carrillo, Juan D., 2005. "A theory of haste," Journal of Economic Behavior & Organization, Elsevier, vol. 56(1), pages 1-23, January.
19. DeJong, David N. & Ripoll, Marla, 2007. "Do self-control preferences help explain the puzzling behavior of asset prices?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1035-1050, May.
20. Rook, Dennis W, 1987. " The Buying Impulse," Journal of Consumer Research, University of Chicago Press, vol. 14(2), pages 189-99, September.

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Citations

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Cited by:

1. Susanna Esteban & Eiichi Miyagawa, 2005. "Optimal Menu of Menus with Self-Control Preferences," NajEcon Working Paper Reviews 784828000000000455, www.najecon.org.
   
   • Esteban, Susanna & Miyagawa, Eiichi, . "Optimal Menu of Menus with Self-Control Preferences," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4997, Universidad Carlos III de Madrid.
   • Esteban, Susanna & Miyagawa, Eiichi, . "Optimal Menu of Menus with Self-Control Preferences," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4992, Universidad Carlos III de Madrid.
   • Susanna Esteban & Eiichi Miyagawa, 2004. "Optimal menu of menus with self-control preferences," Discussion Papers 0405-11, Columbia University, Department of Economics.
2. Daniel Houser & Daniel Schunk & Joachim Winter & Erte Xiao, 2010. "Temptation and commitment in the laboratory," IEW - Working Papers 488, Institute for Empirical Research in Economics - University of Zurich.
3. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
   
   • Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
4. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working papers 2011-24, University of Connecticut, Department of Economics.
5. Klaus Nehring, 2006. "Self-Control through Second-Order Preferences," Levine's Bibliography 321307000000000391, UCLA Department of Economics.
6. Kyle Hyndman & Alberto Bisin, 2009. "Procrastination, Self-Imposed Deadlines and Other Commitment Devices," Departmental Working Papers 0904, Southern Methodist University, Department of Economics.
   
   • Bisin, Alberto & Hyndman, Kyle, 2009. "Procrastination, self-imposed deadlines and other commitment devices," MPRA Paper 16235, University Library of Munich, Germany.
7. D.Dragone, 2005. "Incoerenza Dinamica ed Autocontrollo: Proposta per un'Analisi Interdisciplinare," Working Papers 549, Dipartimento Scienze Economiche, Universita' di Bologna.

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