Strategic technology adoption and hedging under incomplete markets |
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| Institution: | 1. Department of Banking and Finance, Switzerland and Swiss Finance Institute, University of Zurich, Switzerland;2. Department of Banking and Finance, Switzerland and Swiss Finance Institute, University of Zurich, Switzerland;1. School of Economics and Business, University of Chile, Santiago, Chile;2. Center for International Development Harvard. Cambridge, MA, USA |
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| Abstract: | We investigate the implications of technological innovation and non-diversifiable risk on entrepreneurial entry and optimal portfolio choice. In a real options model where two risk-averse individuals strategically decide on technology adoption, we show that the impact of non-diversifiable risk on the option timing decision is ambiguous and depends on the frequency of technological change. Compared to the complete market case, non-diversifiable risk may accelerate or delay the optimal investment decision. Moreover, strategic considerations regarding technology adoption play a central role for the entrepreneur’s optimal portfolio choice in the presence of non-diversifiable risk. |
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