1 / 7

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.

malory
Download Presentation

Presented by Jiyoon Chung

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  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

More Related