Working Paper: CEPR ID: DP2027
Authors: Isabelle Brocas; Juan D. Carrillo
Abstract: We consider the decision of an agent with time inconsistent preferences to undertake an irreversible investment that yields an uncertain current benefit and a delayed cost. We show that, if the flow of information revealed between periods when the investment is postponed is sufficiently high, there is an expected positive information value of waiting. Hence, as under time consistency, only projects with positive Net Present Value (NPV) are initiated. By contrast, if the amount of information transmitted is small, the agent's expected information value of waiting is negative. As a result, an individual may rationally decide to undertake an investment with negative NPV, only to prevent a future investment profitable from a future perspective but highly detrimental from the current viewpoint. We argue that this provides a rationale for haste, i.e. for the tendency of agents to embark on irreversible activities anticipating expected losses. We also discuss some applications of our theory such as impulse buying, destruction of the environment and preservation of endangered species.
Keywords: time inconsistency; haste; investment under uncertainty
JEL Codes: A12; O83; D92; Q20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current investment choices (G11) | future expected outcomes (D84) |
| flow of information about investment profitability (G11) | urgency of investment decisions (G11) |
| high flow of information (D83) | delay investments (D25) |
| low flow of information (D89) | hasty investments (G11) |
| flow of information (O36) | expected information value of waiting (C41) |
| expected information value of waiting (C41) | investment decisions (G11) |