Resource title

The Effect of time-to-build on strategic investment under uncertainty

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Resource description

The authors show that time-to-build, which creates a lag between the decision to invest and production, is an important element of industry structure. They study a multi-period investment game where there is demand uncertainty. Adding time-to-build to the model alters the classic trade-off between making strategic commitments and exploiting the option to wait. Furthermore, time-to-build gives rise to novel equilibria where firms invest incrementally (i.e. in multiple periods). This contrasts with almost all prior work on multi-period investment games where firms invest only once. The authors show how time-to-build affects firm heterogeneity, investment timing, the option value of waiting, the evolution of prices and social welfare.

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en

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application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-49.pdf

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Copyright INSEAD. All rights reserved