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R&D investment under time-inconsistent preferences. (English) Zbl 1457.91409

Summary: We extend the real options model of R&D by incorporating time-inconsistent preferences. We show that time-inconsistent preferences can lead to both under-investment and over-investment in R&D, which depends on the magnitude of technological uncertainty. When the technological uncertainty is low, the sophisticated entrepreneurs exercise earlier than the time-consistent entrepreneur. However, the sophisticated entrepreneurs invest later when the technological uncertainty is high.

MSC:

91G50 Corporate finance (dividends, real options, etc.)
91B38 Production theory, theory of the firm
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