K Wasn’t Built in a Day
IMF Working Papers, April 11, 2025
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Bibliographic details
- Authors: Adriano Fernandes, Rodolfo Rigato
- Published: April 11, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229008747.001
Summary
- Physical capital takes time to build; measurement of time to build and its response to firm behavior are scant.
- This study uses project-level data from India to document cross-sectional heterogeneity in time to build and to identify causal effects of credit supply shocks on project timing.
- Key behavioral response: when credit dries up, firms accelerate ongoing projects and start fewer new projects.
- A novel model of endogenous time to build rationalizes these facts and quantifies the implications for investment dynamics and policy.
Data and Identification
- Data: project-level data from India (project costs and gestation lags).
- Identification: exploit quasi-experimental variation in credit supply to establish causal effects of credit shocks on project timing.
- Empirical regularity: projects proxied to be more mature are sped up the most when credit tightens.
Main Findings
- Firms accelerate ongoing projects and postpone unbegun projects in response to a credit crunch.
- Cross-sectional heterogeneity in time to build is documented across projects.
- Acceleration is concentrated among projects closer to completion (projects proxied to be more mature are sped up the most).
- Endogenous time to build generates endogenous amplification and state-dependence of investment on the distribution of projects along completion stages.
Model and Quantification
- Proposal: a novel model of endogenous time to build where a credit crunch increases firm appetite for immediate relative to delayed cash flows, inducing acceleration of near-complete projects and postponement of unbegun projects.
- Quantification: the model is calibrated/estimated to match the causal estimates from the quasi-experiment and the joint distribution of project costs and gestation lags.
Policy Implications
- Monetary policy: contractionary monetary policy faces headwinds when the distribution of projects skews towards mature projects (i.e., many projects near completion).
- Fiscal/tax policy: tax policy (e.g., tax credits) can flexibly reshuffle investment expenditures over time by affecting project timing decisions.
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