Time-to-build and capacity choice

Avner Bar-Ilan, Agnès Sulem, Alessandro Zanello

Research output: Contribution to journalArticlepeer-review


This paper studies how demand uncertainty and time-to-build interact in affecting irreversible investment activity. Using impulse control methods we find the optimal timing and size of investment for a firm such as an electric utility that considers expanding its capacity in order to meet an uncertain demand. When the construction lag is short, uncertainty delays investment while increasing its size once it takes place. However, for comparatively long, and realistic, times-to-build the sensitivity to uncertainty is drastically reduced and the results can even be reversed; more uncertainty can speed up investment and reduce its size.

Original languageEnglish
Pages (from-to)69-98
Number of pages30
JournalJournal of Economic Dynamics and Control
Issue number1
StatePublished - Jan 2002


  • Capacity
  • Impulse control
  • Irreversible investment

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics


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