Firm Investment Decisions under Hyperbolic Discounting

This paper constructs a model of corporate investment decisions under hyperbolic discounting of present values. The hyperbolic discounted present value can be interpreted as reáecting irrational myopic preferences or, as this paper demonstrates, reduced-form implications of corporate agency issues. Both cases result in an underinvestment problem for the Örm, but the Örm valuation criteria di§er. We show that imposing revenue-neutral dividend taxes or investment subsidies by an outside authority can overcome the Örmís underinvestment problem and consequently increase all periodsí present value of dividends. Lastly, under a multi-period extension with Cobb-Douglas return functions, this paper shows quantitative implications of our model.