The spirit of capitalism, investment, and consumption smoothing

We extend the standard real options approach to analyse the interdependence of investment and consumption decisions by incorporating the spirit of capitalism. For investment, when investment payoff is given as a lump-sum payment, the spirit of capitalism erodes the option value to invest and speeds up investment. However, for a flow investment payoff, the spirit of capitalism encourages the agent to postpone investing since the project value after investment is less than the option value before investment. The results on the investment timing are robust to alternative specifications of the payoff process. For consumption, the agent tends to consume less in the presence of the capitalist spirit. Finally, the time-series properties of consumption and welfare implications of the spirit of capitalism are analysed.