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

Posted: 29 Jan 2003

See all articles by Gonçalo Pacheco-de-Almeida

Gonçalo Pacheco-de-Almeida

HEC Paris - Strategy & Business Policy

Peter B. Zemsky

INSEAD - Strategy; Centre for Economic Policy Research (CEPR)

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.

Suggested Citation

Pacheco-de-Almeida, Gonçalo and Zemsky, Peter B., The Effect of Time-to-Build on Strategic Investment Under Uncertainty. Available at SSRN: https://ssrn.com/abstract=366609

Gonçalo Pacheco-de-Almeida

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351
France
(+33) (0)1 39 67 97 62 (Phone)

HOME PAGE: http://www.hec.edu/en/faculty-research/faculty-directory/faculty-member/pachecodealmeida-goncalo

Peter B. Zemsky (Contact Author)

INSEAD - Strategy ( email )

Boulevard de Constance
77305 Fontainebleau
France
+33 1 60 72 4162 (Phone)
+31 1 60 74 5500 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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