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

This paper characterizes the behavior of investment expenditures, optimal capital stocks, and real interest rates in the time-to-build model of investment. The paper derives equilibrium pricing relationships involving the prices of new and used capital and uses these relationships to obtain simple tests of the underlying investment technology. The paper also demonstrates that empirical versions of the delivery lag model are misspecified because the term structure of interest rates over the time horizon for which investment yields productive capital are omitted and that the use of stock market data to measure Tobin's q is inappropriate within the time-to-build model. Copyright 1993 by Ohio State University Press.