Robust investment and hedging policy with limited commitment

This study examines the impacts of ambiguity aversion on corporate investment and risk management when human capital cannot be alienated. An entrepreneur is concerned about model misspecifications and seeks robust decisions. At optimality, the entrepreneur lowers the maximal debt capacity, invests less and underconsumes in response to ambiguity concerns. When the firm becomes more financially constrained, these distortions are higher. Finally, we quantitatively show that the hedging positions are nonmonotonic in ambiguity aversion because of the interaction between ambiguity and limited commitment frictions.