Template-Type: ReDIF-Paper 1.0

Author-Name: Junjian Miao
Author-X-Name-First: Junjian
Author-X-Name-Last: Miao
Author-Email: miaoj@bu.edu
Author-Workplace-Name: Department of Economics, Boston University

Title: Option Exercise with Temptation

Abstract: This paper analyzes an agent's option exercise decision under uncertainty. The agent decides
whether and when to do an irreversible activity. He is tempted by immediate grati¯cation
and suŽers from self-control problems. This paper adopts the Gul and Pensendorfer self-
control utility model. Unlike the time inconsistent hyperbolic discounting model, it provides
an explanation of procrastination and preproperation based on time consistency. When
applied to the investment and exit problems, it is shown that (i) if the project value is
immediate, an investor may invest in negative NPV projects; (ii) if the production cost is
immediate, a ¯rm may exit even if it makes positive net pro¯ts; and (iii) if both rewards
and costs are immediate, an agent may simply follow the myopic rule which compares only
the current period bene¯t and cost.


Length: 34 pages
Creation-Date: 2005-07
Revision-Date: 
Publication-Status:
File-URL: http://www.bu.edu/econ/workingpapers/papers/Jianjun%20Miao/wp2005/doing12.pdf
File-Format: Application/pdf
File-Function: 
Number: WP2005-007
Classification-JEL: D81, D91
Keywords: self-control, temptation, procrastination, preproperation, option value
Handle: RePEc:bos:wpaper:WP2005-007