IMF Working Papers

K Wasn’t Built in a Day

By Adriano Fernandes, Rodolfo Rigato

April 11, 2025

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Adriano Fernandes, and Rodolfo Rigato. "K Wasn’t Built in a Day", IMF Working Papers 2025, 078 (2025), accessed May 19, 2025, https://doi.org/10.5089/9798229008747.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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 document new facts on cross-sectional heterogeneity in time to build; and exploit quasi-experimental variation in credit supply to establish that firms accelerate ongoing projects and start fewer new projects when credit dries up. We rationalize our findings with a novel model of endogenous time to build. A credit crunch increases firm appetite for immediate relative to delayed cash flows. Firms then accelerate projects closer to completion 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 our model to match our causal estimates, and the joint distribution of project costs and gestation lags. Endogenous time to build generates endogenous amplification and state-dependence of investment on the distribution of projects along completion stages. Endogenous time to build is policy relevant. Contractionary monetary policy faces headwinds when the distribution of projects skews towards mature projects. Tax policy, in turn, can flexibly reshuffle investment expenditures over time with tax credits.

Subject: Credit, Discount rates, Financial institutions, Financial services, Investment policy, Loans, Money, National accounts, Tax allowances, Taxes

Keywords: Business fluctuation, Business Fluctuations, Corporate Finance, Credit, Discount rate shock, Discount rates, Global, Investment, Investment policy, Loans, Project cost, State-dependence of investment, Tax allowances, Time to Build, Unbegun project

Publication Details

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