Jianjun Miao Option exercise with temptation
نویسندگان
چکیده
This paper adopts the Gul and Pensendorfer self-control utility model to analyze an agent’s option exercise decision under uncertainty over an infinite horizon. The agent decides whether and when to do an irreversible activity. He is tempted by immediate gratification and suffers from self-control problems. The cost of self-control lowers the benefit from continuation or stopping and may erode the option value of waiting. When applied to the investment and exit problems, the model can generate the behavior of procrastination and preproperation. In addition, unlike the hyperbolic discounting model, the model here provides a unique prediction.
منابع مشابه
Option Exercise with Temptation∗
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 selfcontrol utility model. Unlike the time inconsistent hyperbolic discounting model, it provides an explanation of procrastination...
متن کاملRisk, uncertainty, and option exercise
Many economic decisions can be described as an option exercise or optimal stopping problem under uncertainty. Motivated by experimental evidence such as the Ellsberg Paradox, we follow Knight (1921) and distinguish risk from uncertainty. To afford this distinction, we adopt the multiple-priors utility model. We show that the impact of ambiguity on the option exercise decision depends on the rel...
متن کاملInternet Appendix for “Entrepreneurial Finance and Non-diversifiable Risk”
This internet appendix contains supplemental materials for the published article. It is organized as follows. Section A considers the effect of borrowing constraints on the entrepreneur’s decisions. Section B models investment as a real option instead of a take-it-or-leave-it project. Section C examines the quantitative impact of under-diversified investors on debt pricing.
متن کاملInvestment , Hedging , and Consumption Smoothing ∗
This paper analyzes a risk averse entrepreneur’s real investment decision under incomplete markets. The entrepreneur smoothes his intertemporal consumption by investing in both a risk-free asset and a risky asset, which allows him to partially hedge against the project cash flow risk. We show that risk aversion lowers both the project value upon investment and the option value of waiting to inv...
متن کاملThe Real Option Approach to Adoption and Discontinuation of Management Accounting Innovation: The Case of Activity-Based Costing
This paper employs real option approach (ROA) to study the decision of ABC adoption and discontinuation under uncertainty. The general idea behind is that investing in ABC system is an option-rights as in financial American call option. The proposed model takes the total annual number of production of a firm as the primary decision variables. The added annual net profits after establishing ABC ...
متن کامل