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

Gonçalo Pacheco-De-Almeida and Peter Zemsky
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Gonçalo Pacheco-De-Almeida: Stern school of business - NYU - New York University [New York] - NYU - NYU System
Peter Zemsky: INSEAD - Institut Européen d'administration des Affaires

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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.

Keywords: Time-to-Build; strategic investment; uncertainty (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (23)

Published in The RAND Journal of Economics, 2003, Vol. 34, issue 1, p.166-182

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00576375

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