K Wasn’t Built in a Day: Investment with Endogenous Time to Build
(joint with Rodolfo Rigato)
Physical capital takes time to build. Yet, the measurement of time to build and of its response to firm behavior remain scant. We fill this gap using project-level data from India. We first document new facts about time to build. Industry heterogeneity accounts for 30% of its variation; and time to build increases on average by 0.18% for each 1% increase in project cost. We exploit quasi-experimental variation in credit supply to document that firms have control over time to build. When credit dries up, the conditional probability of completing a project over the following quarter rises by 6%, consistent with firms accelerating project development. In turn, new project starts fall by 7.5%. To rationalize our findings, we introduce a model of endogenous time to build. A credit crunch increases firm appetite for immediate cash flows relative to delayed cash flows. Firms then accelerate existing, closer to completion projects and postpone unbegun projects. Such a mechanism is borne out in the data: projects proxied to be more mature are sped up the most. We quantify endogenous time to build by calibrating our model to match our causal estimates, and the joint distribution of project-level costs and gestation lags. Moving from exogenous to endogenous time to build amplifies the response of investment to shocks, increasing investment volatility by up to 30%. Endogenous gestation lags are policy relevant. Monetary policy is more potent when the distribution of projects along their gestation cycle skews towards mature projects. Fiscal policy, in turn, can flexibly reshuffle investment expenditures over time with tax credits.