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Dynamics of Entrepreneurship under Regime Switching

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DOI: 10.4236/jmf.2013.33038    3,355 Downloads   5,274 Views  

ABSTRACT

We propose a tractable model of entrepreneur dynamics where the investment conditions are stochastic. Applying the approach of stochastic control and optimization, we solve the dynamics of the entrepreneur’s optimal investment, consumption and portfolio allocation under regime switching. We find that the interactions of precautionary savings and liquidation boundary advance/postpone motives generate rich implications for entrepreneur dynamics. Facing the threat of financial crisis, entrepreneurs build cash reserves and bring forward liquidation option exercise to mitigate downside risk. During the bad times, entrepreneurs value financial slack and postpone liquidation boundary to maintain the business and wait for the good state to come.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

S. Sun, J. Yang and M. Li, "Dynamics of Entrepreneurship under Regime Switching," Journal of Mathematical Finance, Vol. 3 No. 3, 2013, pp. 374-382. doi: 10.4236/jmf.2013.33038.

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