A smooth ambiguity model of investment timing under asymmetric information

This paper incorporates ambiguity into a principal-agent framework wherein an owner delegates the investment decision of a project in continuous time to a manager. Information is asymmetric in that the owner faces ambiguity regarding the uncertain investment cost of the project (low or high) but the manager privately observes the true value. Ambiguity aversion is shown to induce the owner to act in a pessimistic manner with a perception that the probability of having the low investment cost is smaller than what the objective beliefs suggest, resulting in a distortion on the equilibrium tradeoff between investment efficiency and information rent.