Investment Timing and Reputation

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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 strategies are dictated by the prior belief about the project’s quality: a high-ability agent plays a dynamic cutoff strategy, where the cutoffs are bounded below by the prior. Agents are reputationally rewarded for both speed and accuracy, but accuracy becomes less consequential for reputation over time. Compared to a benchmark where the agent has no reputational motive, investment timing may be either premature or delayed. For projects with a large downside potential, reputation induces premature investment. Meanwhile, when projects have a positive net present value ex-ante, reputation induces delayed investment.