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Optimal dividend-financing strategies in a dual risk model with time-inconsistent preferences

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  • Chen, Shumin
  • Wang, Xi
  • Deng, Yinglu
  • Zeng, Yan

Abstract

In this paper, we consider an optimal dividend-financing problem for a company whose capital reserve is described by the dual of classical risk model. We assume that the manager of the company has time-inconsistent preferences, which are described by a quasi-hyperbolic discount function, and that financing is permitted to prevent the company from going bankrupt. The manager’s objective is to maximize the expected cumulative dividend payments minus financing costs. We solve the optimization problems for a naive manager and a sophisticated manager, and obtain explicit solutions for both managers. Our results show that the manager with time-inconsistent preferences tends to pay out dividends earlier. We also present some economic implications and sensitivity analysis for our results.

Suggested Citation

  • Chen, Shumin & Wang, Xi & Deng, Yinglu & Zeng, Yan, 2016. "Optimal dividend-financing strategies in a dual risk model with time-inconsistent preferences," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 27-37.
    • Handle: RePEc:eee:insuma:v:67:y:2016:i:c:p:27-37
    DOI: 10.1016/j.insmatheco.2015.11.005
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    Cited by:

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    2. Zhu, Jinxia & Siu, Tak Kuen & Yang, Hailiang, 2020. "Singular dividend optimization for a linear diffusion model with time-inconsistent preferences," European Journal of Operational Research, Elsevier, vol. 285(1), pages 66-80.
    3. Yanzhao Li & Ju'e Guo & Yongwu Li & Xu Zhang, 2021. "Optimal exit decision of venture capital under time-inconsistent preferences," Papers 2103.11557, arXiv.org.
    4. Shigeta, Yuki, 2022. "Quasi-hyperbolic discounting under recursive utility and consumption–investment decisions," Journal of Economic Theory, Elsevier, vol. 204(C).
    5. Yehong Yang & Guohua Cao, 2021. "Optimal investment and endogenous payout strategy with time inconsistency," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 707-723, January.
    6. Soren Christensen & Kristoffer Lindensjo, 2019. "Moment constrained optimal dividends: precommitment \& consistent planning," Papers 1909.10749, arXiv.org.
    7. Kristoffer Lindensjo & Filip Lindskog, 2019. "Optimal dividends and capital injection under dividend restrictions," Papers 1902.06294, arXiv.org.
    8. Ernst, Philip A. & Imerman, Michael B. & Shepp, Larry & Zhou, Quan, 2022. "Fiscal stimulus as an optimal control problem," Stochastic Processes and their Applications, Elsevier, vol. 150(C), pages 1091-1108.
    9. Chen, Shumin & Zeng, Yan & Hao, Zhifeng, 2017. "Optimal dividend strategies with time-inconsistent preferences and transaction costs in the Cramér–Lundberg model," Insurance: Mathematics and Economics, Elsevier, vol. 74(C), pages 31-45.
    10. Kristoffer Lindensjö & Filip Lindskog, 2020. "Optimal dividends and capital injection under dividend restrictions," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 92(3), pages 461-487, December.
    11. Yanzhao Li & Ju-e Guo & Shaolong Sun & Yongwu Li, 2022. "How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.

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