Entrepreneurship Dynamics under Time Inconsistent Preferences

Abstract

We investigate the implications of time inconsistent preferences on the entrepreneurial decision making. We use a time varying preference model to capture the optimal liquidation choice and investment allocation for the averse risk agent in the incomplete market. Compared to standard entrepreneurial dynamic framework, our model shows that inconsistent preferences may lead to under investment when the entrepreneur faces liquidity constraint and over investment when his liquid wealth is far away from the liquidation boundary. Moreover, the possibility of changing to the future stage has ambiguous influences on the exit decision and optimal investment.