Optimal Entrepreneurial Decisions in a Completely Stochastic Environment

Abstract

This paper develops a normative model of the entrepreneur's decision problem in which the following elements are stochastic: the entrepreneur's preferences, his lifetime, the returns from investments, and the process obeyed by the interest rate. Furthermore, the entrepreneur's preferences are assumed to be sensitive to the opportunities facing him at each decision point as well as other environmental factors. At each decision point the entrepreneur must decide how to allocate his resources between consumption, life insurance, various investment opportunities, and lending/borrowing. His objective is postulated to be the maximization of expected utility from consumption as long as he lives and from the bequest left upon his death. Optimal decision functions are obtained in closed form for a class of utility functions; their properties are examined and compared to those of the optimal strategies of less general models.