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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
 Research question: Does time-to-build matter for the theory
of strategic investment under uncertainty?
 Model
 Equilibrium analysis
 Comparative statics
 Conclusion
Model
A firm maximizes a weighted average of its expected period-II and –III revenues less the
expected cost of investment.
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.
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
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
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