Skip to main content

Time-to-Build, Delivery Lags, and Equilibrium Pricing of Capital Goods

Working Paper 286 | Published October 1, 1985

Download PDF

Author

Default people image

Sumru Altug

Time-to-Build, Delivery Lags, and Equilibrium Pricing of Capital Goods

Abstract

This paper characterizes the behavior of investment expenditures, optimal capital stocks, and real interest rates in the time-to-build model of investment. These results are used to show that the delivery lag model of investment fails to account for time lags in investment when constructing the cost of capital variable and hence, misspecifies the effects of interest rates on investment expenditures. Second, this paper derives equilibrium pricing relationships involving the prices of existing capital and uses these relationships to obtain simple tests of the underlying investment technology. Despite the widespread use of 'q' in the empirical investment literature, it is shown that the relationship between current investment and an appropriately defined measure of Tobin's 'q' contains no such testable implications. Finally, it is shown that the practice of using stock market data to measure the price of existing capital is invalid when time lags exist in the investment process.


Published in _Journal of Money, Credit and Banking_ (vol. 25, no. 3, pt. 1, (August 1993, pp. 301-319), https://doi.org/10.2307/2077764.