Optimal R&D investment for a risk-averse entrepreneur
Whalley, A. Elizabeth. (2011) Optimal R&D investment for a risk-averse entrepreneur. Journal of Economic Dynamics and Control, Volume 35 (Number 4). pp. 413-429. ISSN 0165-1889Full text not available from this repository.
Official URL: http://dx.doi.org/10.1016/j.jedc.2009.11.009
Entrepreneurs investing in R&D projects face technical uncertainty associated with the cost to completion of the project, which is idiosyncratic and inherently unhedgeable. We extend existing real options models of R&D investment to incorporate the cost of bearing this unhedgeable risk and find it decreases risk-averse entrepreneurs' valuations of R&D projects and increases the minimum NPVs required for continued investment in R&D (threshold NPVs) relative to 'unpriced risk' values and threshold NPVs. As in the 'unpriced risk' case, for less risk-averse entrepreneurs with small R&D projects, threshold NPVs remain negative and decrease with technical uncertainty. However, for sufficiently risk-averse entrepreneurs with sufficiently large R&D projects, threshold NPVs can become positive and increase with technical uncertainty. (C) 2010 Elsevier B.V. All rights reserved.
|Item Type:||Journal Article|
|Subjects:||H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
|Divisions:||Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Research and development projects, Risk, Utility theory, Entrepreneurship|
|Journal or Publication Title:||Journal of Economic Dynamics and Control|
|Publisher:||Elsevier Science BV|
|Number of Pages:||17|
|Page Range:||pp. 413-429|
|Access rights to Published version:||Restricted or Subscription Access|
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