The Impact of Lead Time on Capital Investments

Talat Genc

No 1704, Working Papers from University of Guelph, Department of Economics and Finance

Abstract: We study equilibrium investment strategies of firms competing in stochastic dynamic market settings and facing two types of investment structures: investment with significant lead time (or time-to-build) and investment without (or minor) lead time. We investigate how investment behavior changes when investment is subject to time-to-build versus when it is not. We characterize equilibrium investment strategies under several information structures and compare results to the social optimum. We offer some new results. The model predicts that, controlling for demand, and production and investment costs, investments and outputs can be higher in progressive industries (which often exhibit time-to-build) than in fast-paced industries (where time-to-build is insignificant). Furthermore, for both investment types (investment with or without time-to-build) we offer a novel equilibrium in which firms incrementally invest. This behavior is driven by demand uncertainty and capacity constraints. Also, expected outputs are lower than Cournot outputs as firms face uncertainty. Moreover, the amount of uncertainty has different effects over investment types.

Keywords: Capacity Investment; Capacity Constraints; Progressive Industry; Fast-paced Industry; Demand uncertainty; Time-to-build; Markov perfect Equilibrium; Open-loop Equilibrium (search for similar items in EconPapers)
JEL-codes: C73 D92 E22 G31 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2017
New Economics Papers: this item is included in nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: The impact of lead time on capital investments (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2017-04

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