EconPapers    
Economics at your fingertips  
 

Time-to-build and capacity expansion

Haejun Jeon (jeon@rs.tus.ac.jp)
Additional contact information
Haejun Jeon: Tokyo University of Science

Annals of Operations Research, 2023, vol. 328, issue 2, No 12, 1494 pages

Abstract: Abstract In this study, we investigate a firm’s optimal investment timing and capacity decisions in the presence of uncertain time-to-build. The firm raises revenue from the investment after an uncertain amount of time elapses, while the time-to-build of the follow-up investment is expectedly shorter than that of the initial investment due to learning by doing. We derive the optimal investment strategies and examine the impact of time-to-build on the investment dynamics. We show that both the initial and follow-up investment can be made earlier in the presence of time-to-build than they would in the absence of the lags, especially in a volatile market. This is in contrast to the case of a single investment, whose timing is always delayed by the time-to-build. Furthermore, the capacity of the follow-up project dominates that of the initial project in the presence of time-to-build, whereas the latter dominates the former in the absence of lags. The capacity choice of each project, however, is nonmonotone with respect to the size of the lags. We also show that uncertainty delays investment even when the investment involves lags but the negative impact softens in the presence of time-to-build and learning effects.

Keywords: Time-to-build; Investment lags; Learning by doing; Capacity expansion; Real options (search for similar items in EconPapers)
JEL-codes: D24 D25 G31 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10479-023-05413-3 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:328:y:2023:i:2:d:10.1007_s10479-023-05413-3

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-023-05413-3

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla (sonal.shukla@springer.com) and Springer Nature Abstracting and Indexing (indexing@springernature.com).

 
Page updated 2024-12-29
Handle: RePEc:spr:annopr:v:328:y:2023:i:2:d:10.1007_s10479-023-05413-3