Working Paper: CEPR ID: DP2213
Authors: Isabelle Brocas; Juan D. Carrillo
Abstract: We analyze the investment decision of a population of time inconsistent entrepreneurs who overweight current payoffs relative to future returns. We show that, in order to avoid inefficient procrastination, agents may find it optimal to keep optimistic priors about their chances of success and 'blindly invest'. This explains entrepreneurial boldness and entry mistakes (or an excessive level of investment in the economy) without assuming the existence of boundedly rational, 'intrinsically optimistic' managers. We also prove that: (i) there is a negative correlation between the risk free rate and theproportion of bold entrepreneurs in the economy, (ii) realist and bold agents can coexist and achieve the same payoff and (iii) entrepreneurs with highest ability are most likely to keep optimistic prospects and make entry mistakes.
Keywords: Time inconsistency; Behavioral finance; Investment; Boldness; Optimism
JEL Codes: A12; D81; D92; G39
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk-free rate (G12) | proportion of bold entrepreneurs (L26) |
| proportion of bold entrepreneurs (L26) | entry mistakes (Y20) |
| managerial ability (M54) | boldness (Y60) |