DP2027 A Theory of Haste with Applications to Construction of Nuclear Power Plants and Extinction of Endangered Species
|Author(s):||Isabelle Brocas, Juan D Carrillo|
|Publication Date:||November 1998|
|Keyword(s):||haste, investment under uncertainty, Time Inconsistency|
|JEL(s):||A12, D83, D92, Q20|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=2027|
We consider the decision of an agent with time inconsistent preferences to undertake an irreversible investment that yields an uncertain current benefit and a delayed cost. We show that, if the flow of information revealed between periods when the investment is postponed is sufficiently high, there is an expected positive information value of waiting. Hence, as under time consistency, only projects with positive Net Present Value (NPV) are initiated. By contrast, if the amount of information transmitted is small, the agent's expected information value of waiting is negative. As a result, an individual may rationally decide to undertake an investment with negative NPV, only to prevent a future investment profitable from a future perspective but highly detrimental from the current viewpoint. We argue that this provides a rationale for haste, i.e. for the tendency of agents to embark on irreversible activities anticipating expected losses. We also discuss some applications of our theory such as impulse buying, destruction of the environment and preservation of endangered species.