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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. doi:10.1016/j.jedc.2009.11.009

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Official URL: http://dx.doi.org/10.1016/j.jedc.2009.11.009

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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
Dates:
DateEvent
April 2011Published
Volume: Volume 35
Number: Number 4
Number of Pages: 17
Page Range: pp. 413-429
DOI: 10.1016/j.jedc.2009.11.009
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

Data sourced from Thomson Reuters' Web of Knowledge

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