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Time preference and real investment

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  • Choi, Kyoung Jin
  • Kwak, Minsuk
  • Shim, Gyoocheol

Abstract

This paper studies the investment timing problem of an entrepreneur with a non-tradable real option with undiversifiable risk. We find that the time preference can have a significant impact on the risk attitude toward the idiosyncratic risk, which results from the wealth effect on the implied option value. If the agent is impatient (patient), an increase in idiosyncratic volatility increases (decreases) the agent’s value and delays (hastens) investment. This finding suggests several important implications and empirical predictions for investment decisions in private firms and public firms with concentrated ownership.

Suggested Citation

  • Choi, Kyoung Jin & Kwak, Minsuk & Shim, Gyoocheol, 2017. "Time preference and real investment," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 18-33.
    • Handle: RePEc:eee:dyncon:v:83:y:2017:i:c:p:18-33
    DOI: 10.1016/j.jedc.2017.07.010
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    Cited by:

    1. Alexander, Carol & Chen, Xi & Ward, Charles, 2021. "Risk-adjusted valuation for real option decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 1046-1064.
    2. Yingjie Niu & Jinqiang Yang & Zhentao Zou, 2021. "Investment decisions under incomplete markets in the presence of wealth effects," Journal of Economics, Springer, vol. 133(2), pages 167-189, July.
    3. Carol Alexander & Xi Chen, 2021. "Model risk in real option valuation," Annals of Operations Research, Springer, vol. 299(1), pages 1025-1056, April.

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    More about this item

    Keywords

    Time preference; Risk attitude; Wealth effect; Real option; Idiosyncratic risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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