"Time-to-build" models of investment expenditures play an important role in many traditional and modern theories of the business cycle, especially for explaining the dynamic propagation of shocks. We estimate the structural parameters of a time-to-build model using annual firm-level investment data on equipment and structures. For expenditures on equipment, we find no evidence of time-to-build effects beyond one year. For expenditures on structures, by contrast, there is clear evidence of such effects in the range of two to three years. The contrast between equipment and structures is intuitively reasonable and consistent with previous results. The estimates for structures also indicate that initial-period expenditures are low and increase as projects near completion. These results provide empirical support for including "time-to-plan" effects for investment in structures. More generally, these results suggest a potential source of specification error for Q models of investment and production-based asset pricing models that ignore the time required to plan, build, and install new capital. (JEL: D24, G31, C33, C34) (c) 2008 by the European Economic Association.
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Find related papers by JEL classification: D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models
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