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The Impact of Lead Time on Capital Investments

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  • Talat S. Genc

    (Department of Economics, University of Guelph, Guelph ON Canada)

Abstract

We study equilibrium investment strategies of firms competing in stochastic dynamic market settings and facing two types of investment structures: investment with significant lead time (or time-to-build) and investment without (or minor) lead time. We investigate how investment behavior changes when investment is subject to time-to-build versus when it is not. We characterize equilibrium investment strategies under several information structures and compare results to the social optimum. We offer some new results. The model predicts that, controlling for demand, and production and investment costs, investments and outputs can be higher in progressive industries (which often exhibit time-to-build) than in fast-paced industries (where time-to-build is insignificant). Furthermore, for both investment types (investment with or without time-to-build) we offer a novel equilibrium in which firms incrementally invest. This behavior is driven by demand uncertainty and capacity constraints. Also, expected outputs are lower than Cournot outputs as firms face uncertainty. Moreover, the amount of uncertainty has different effects over investment types.

Suggested Citation

  • Talat S. Genc, 2017. "The Impact of Lead Time on Capital Investments," Working Papers 1704, University of Guelph, Department of Economics and Finance.
    • Handle: RePEc:gue:guelph:2017-04
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    Cited by:

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    3. Talat S. Genc & Stephen Kosempel, 2023. "Energy Transition and the Economy: A Review Article," Energies, MDPI, vol. 16(7), pages 1-26, March.
    4. J. Atsu Amegashie, 2024. "The Importance of Social Status in a Rent-Seeking Society," CESifo Working Paper Series 10894, CESifo.
    5. Genc, Talat S., 2024. "Energy Transition and the role of new natural gas turbines for power production: The case of GT11N2 M generators," Energy Economics, Elsevier, vol. 131(C).
    6. Talat Genc & Pietro De Giovanni, 2021. "Dynamic pricing and green investments under conscious, emotional, and rational consumers," Working Papers 2101, University of Guelph, Department of Economics and Finance.

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    More about this item

    Keywords

    Capacity Investment; Capacity Constraints; Progressive Industry; Fast-paced Industry; Demand uncertainty; Time-to-build; Markov perfect Equilibrium; Open-loop Equilibrium;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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