A Model of Entrepreneurial Activity with Two Actions Over Time and Under Uncertainty

Abstract

We analyze the activities of an entrepreneur who must, at each date, decide whether to search for a new production technique or to produce output with an extant technique. Our analysis leads to four results. First, we show that if our entrepreneur rejects a particular production technique at a specific point in time then he will never accept this same technique at a subsequent point in time. Second, we demonstrate that if our entrepreneur accepts a particular production technique at a specific point in time then he will continue to produce with this technique at all succeeding points in time. Third, we show that there is a threshold production technology level and that our entrepreneur’s optimal policy involves accepting (rejecting) all techniques above (below) this threshold. Finally, we study the effects of increases in an exogenous income source and the discount factor on our entrepreneur’s threshold technology level.