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Journal Articles The RAND Journal of Economics Year : 2003

The Effect of Time-to-Build on Strategic Investment under Uncertainty

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Abstract

We show that time-to-build, which creates a lag between the decision to invest and production, is an important element of industry structure. We study a multiperiod investment game where there is demand uncertainty. Adding time-to-build to the model alters the classic tradeoff between making strategic commitments and exploiting the option to wait. Furthermore, time-to-build gives rise to novel equilibria in which firms invest incrementally, which contrasts with most prior work on multiperiod investment games in which firms invest only once. We show how time-to-build affects firm heterogeneity, investment timing, the option value of waiting, the evolution of prices, and social welfare.
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Dates and versions

hal-00576375 , version 1 (14-03-2011)

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  • HAL Id : hal-00576375 , version 1

Cite

Gonçalo Pacheco-De-Almeida, Peter Zemsky. The Effect of Time-to-Build on Strategic Investment under Uncertainty. The RAND Journal of Economics, 2003, Vol. 34, issue 1, p.166-182. ⟨hal-00576375⟩

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