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Presented by Jiyoon Chung

Pacheco de Almeida, Goncalo and Peter Zemsky (2003). The effect of time-to-build on strategic investment under uncertainty. Rand Journal of Economics, 34 (1): 167-183. Presented by Jiyoon Chung. Overview.

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Presented by Jiyoon Chung

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  1. Pacheco de Almeida, Goncalo and Peter Zemsky (2003). The effect of time-to-build on strategic investment under uncertainty. Rand Journal of Economics, 34 (1): 167-183. Presented by Jiyoon Chung

  2. Overview • Research question: Does time-to-build matter for the theory of strategic investment under uncertainty? • Model • Equilibrium analysis • Comparative statics • Conclusion

  3. Model A firm maximizes a weighted average of its expected period-II and –III revenues less the expected cost of investment.

  4. Equilibrium Analysis • Equilibrium Typology • Delay equilibrium: Both firms wait to invest. • Incremental Cournot equilibrium: Both firms make the same incremental investment. • Commit-delay equilibrium: One of the firms commits while the other delays investment. • Commit-incremental equilibrium: One of the firms commits, while the other makes an incremental investment.

  5. Equilibrium Analysis • The magnitude of uncertainty determines which equilibrium exists. Without time-to-build, • If uncertainty great  Delay • If uncertainty low  Commit-delay • With time-to-build, an initial price premium exists • The tradeoff between commitment and flexibility is altered • If short time-to-build and low uncertainty  Commit-incremental • If long time-to-build and low uncertainty  Incremental Cournot

  6. Comparative Statics • If time-to-build increases, • Social welfare decreases • The extent to which firms exploit the option to wait decreases • The price premium decreases

  7. Conclusion • For a sufficiently long time-to-build or sufficiently small uncertainty, Incremental Cournot is the unique equilibrium • Introducing time-to-build • Shifts (non-monotonically) the classic tradeoff between commitment and exploiting the option to wait • Gives rise to novel types of equilibria where firms make incremental investments • Links models of investment timing to the evolution of product prices

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