Three papers on capital gestation lags and their effects on investment and the value of capital.

Investment models typically assume that newly-purchased capital goods join the productive capital stock with little or no delay; and that no lead time is required to plan investment. When this is the case, the current marginal q is usually the appropriate statistic for current investment. This dissertation considers cases where an individual firm's capital accumulation is subject to distinct gestation lags for building and planning. In this context, Q is generally correlated to investment, even in the absence of adjustment costs, because of the existence of rents owing to the short run scarcity of capital relative to a situation where firms can change productive capital immediately. However, gestation lags cause this relationship to be noisy, with the strength of the correlation depending on the relative prevalence of temporary and permanent disturbances in the economy. This provides insight into the disappointing performance of Q in investment regressions, and the perceived excess sensitivity of investment to cash flows. This dissertation comprises three separate chapters, which examine the gestation lag story under differing assumptions. The first chapter examines a case where individual competitive firms have only one variety of capital available for production, which requires distinct planning and building periods, but no other explicit adjustment costs. The second chapter extends this analysis to a case with two varieties of capital: one with a single-period building horizon, the other with a gestation horizon of arbitrary duration. The final chapter returns to a case with a single variety of capital that is subject to a building lag and convex adjustment costs. The work provides empirical evidence for the existence of non-trivial lags for both planning and building, and estimates the duration of each. In addition, empirical evidence is presented that is consistent with the gestation lags view, but challenging to other models of investment that appear in the literature.PhDEconomicsFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/125165/2/3186708.pd