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

Goncalo Pacheco-de-Almeida and Peter Zemsky

RAND Journal of Economics, 2003, vol. 34, issue 1, 166-82

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. Copyright 2003 by the RAND Corporation.

Date: 2003
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