Innovation and information acquisition under time inconsistency and uncertainty

Abstract

When an agent invests in new industrial activities, he has a limited initial knowledge of his project's returns. Acquiring information allows him both to reduce the uncertainty on the dangerousness of this project and to limit potential damages that it might cause on people's health and on the environment. In this paper, we study whether there exist situations in which the agent does not acquire information. We find that an agent with time-consistent preferences, as well as an agent with hyperbolic ones, will acquire information unless its cost exceeds the direct benefit they could get with this information. Nevertheless, a hyperbolic agent may remain strategically ignorant and, when he does acquire information, he will acquire less information than a time-consistent type. Moreover, a hyperbolic-discounting type who behaves as a time-consistent agent in the future is more inclined to stay ignorant. We then emphasize that this strategic ignorance depends on the degree of precision of the information. Finally, we analyse the role that existing liability rules could play as an incentive to acquire information under uncertainty and with regard to the form of the agent's preferences. © 2011 The International Association for the Study of Insurance Economics 1554-964X/11.