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Optimal R&D investment for a risk-averse entrepreneur
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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 0165-1889
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Official URL: http://dx.doi.org/10.1016/j.jedc.2009.11.009
Abstract
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 |
| ISSN: | 0165-1889 |
| Official Date: | April 2011 |
| Volume: | Volume 35 |
| Number: | Number 4 |
| Number of Pages: | 17 |
| Page Range: | pp. 413-429 |
| Identification Number: | 10.1016/j.jedc.2009.11.009 |
| Status: | Peer Reviewed |
| Publication Status: | Published |
| Access rights to Published version: | Restricted or Subscription Access |
| URI: | http://wrap.warwick.ac.uk/id/eprint/41340 |
Data sourced from Thomson Reuters' Web of Knowledge
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