Time-to-build and capacity expansion Haejun Jeon Annals of Operations Research, 2023 In this study, we investigate a firm’s optimal investment timing and capacity decisions in the presence of uncertain time-to-build. The firm raises revenue from the investment after an uncertain amount of time elapses, while the time-to-build of the follow-up investment is expectedly shorter than that of the initial investment due to learning by doing. We derive the optimal investment strategies and examine the impact of time-to-build on the investment dynamics. We show that both the initial and follow-up investment can be made earlier in the presence of time-to-build than they would in the absence of the lags, especially in a volatile market. This is in contrast to the case of a single investment, whose timing is always delayed by the time-to-build. Furthermore, the capacity of the follow-up project dominates that of the initial project in the presence of time-to-build, whereas the latter dominates the former in the absence of lags. The capacity choice of each project, however, is nonmonotone with respect to the size of the lags. We also show that uncertainty delays investment even when the investment involves lags but the negative impact softens in the presence of time-to-build and learning effects.
Investment and financing decisions in the presence of time-to-build Haejun Jeon European Journal of Operational Research, 2021 We study a firm’s optimal decisions on investment, default, and financing when the amount of time and the running costs for project completion are uncertain. In the presence of time-to-build, a firm makes conservative investment and financing decisions; investment is delayed, and the optimal leverage ratio is inverted U-shaped with respect to the size of the lag. Although equity holders can choose to default before the project has been completed, the default probability in the presence of time-to-build is lower than that in the absence of a lag in most cases because of the conservative investment and financing decisions. Given the lower default probability, equity holders may benefit more from debt financing in the presence of time-to-build than they would in the absence of a lag. When firms can shorten their expected time-to-build by bearing more costs, unlevered firms strive to reduce the lag more than optimally levered firms do. However, highly levered firms utilize more resources to reduce the lag than all-equity firms do because equity holders are more concerned about the possibility of default before the project’s completion.
Investment timing and capacity decisions with time-to-build in a duopoly market Haejun Jeon Journal of Economic Dynamics and Control, 2021 In this study, we investigate optimal investment timing and capacity decisions in the presence of time-to-build and competition. Due to uncertain time-to-build, a leader, who invests first, may have its product enter the market after a follower’s. We show that a dominated firm with the longer time-to-build can become a leader by making the investment earlier than a dominant firm with shorter investment lags. The leader’s capacity choice increases with the dominated firm’s time-to-build, even if the dominated entity is the leader. This finding is consistent with the observation in the electric vehicles market in which a relatively new firm with little experience of mass production makes aggressive investment early on, while the biggest carmakers capable of mass production are timing their investment. With a welfare-maximizing policy, however, the dominant firm with the shorter time-to-build always becomes the leader. There is a significant loss of social welfare with the dominated firm being the leader, and the loss increases with the asymmetry of time-to-build.
Licensing and information disclosure under asymmetric information Haejun Jeon European Journal of Operational Research, 2019 We examine a license contract in a vertically separated market in the presence of a competitor’s challenge and information asymmetry. When technology’s value is not observable, innovators with more valuable technology disclose their private information to receive a fair payment despite a rival’s earlier challenge, whereas the owner of less valuable technology reveals nothing. We show that the more valuable technology is and the less bargaining power the innovator has, the more information the innovator discloses. This finding is consistent with empirical evidence on inventors’ disclosure strategy after the American Inventors Protection Act (AIPA). Furthermore, we show that despite the information disclosure, innovators make R&D investment earlier than they would have under symmetric information. This is in contrast with conventional wisdom that the need to disclose complementary information may retard innovation, and can be explained by the interaction between the decisions of investment timing and information disclosure. Though the leading innovator suffers losses from information asymmetry, the total value of the firms in the market may increase due to the diffusion of knowledge.
Patent protection and R&D subsidy under asymmetric information Haejun Jeon International Review of Economics and Finance, 2019 We examine a technology licensing under asymmetric information and discuss the effects of R&D policies. In particular, we investigate an innovator's investment strategy and the efficiency of policies from a dynamics perspective. We show that perfect patent protection is optimal under symmetric information, whereas this is not so if the licensor has private information. Furthermore, we show that social welfare under asymmetric information is higher than that under symmetric information for most patent protection levels, yet the latter dominates the former in the presence of an optimal policy for each regime. An R&D subsidy is found suboptimal under symmetric information, whereas it can be optimal given information asymmetry. This allows us to derive a combination of patent protection and R&D subsidy that yields the first-best results under asymmetric information in multiple industries simultaneously.
