TITLE:
Entrepreneurship Dynamics under Time Inconsistent Preferences
AUTHORS:
Yang Liu, Jinqiang Yang
KEYWORDS:
Time Inconsistency, Liquidity Constraints, Precautionary Saving, Optimal Liquidation, Investment Strategy
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.5 No.1,
February
11,
2015
ABSTRACT: We investigate the implications of time inconsistent preferences on the entrepreneurial decision making. We use a time varying preference model to capture the optimal liquidation choice and investment allocation for the averse risk agent in the incomplete market. Compared to standard entrepreneurial dynamic framework, our model shows that inconsistent preferences may lead to under investment when the entrepreneur faces liquidity constraint and over investment when his liquid wealth is far away from the liquidation boundary. Moreover, the possibility of changing to the future stage has ambiguous influences on the exit decision and optimal investment.