MICRO/THEORY: Investment Timing and Reputation; Dr Sara Shahanaghi (Toulouse School of Economics)

Abstract:

An agent learns dynamically about the profitability of a project and decides when to make an irreversible investment. The agent seeks to maximize his reputation for learning. Equilibrium investment behavior is dictated by the prior about the project: the agent can be more willing to invest in projects that are ex-ante less likely to succeed. Agents are rewarded for both speed and accuracy, but accuracy becomes less consequential for reputation over time. Compared to a benchmark where the agent is profit-driven, investment may be either premature or delayed. For projects with a low probability of success or large downside potential, reputation induces premature investment. Meanwhile, for projects with a high probability of success, reputation induces delayed investment.

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