K Wasn’t Built in a Day

K Wasn’t Built in a Day Investment with Endogenous Time to Build Adriano Fernandes and Rodolfo Rigato WP/25/78 IMF Working Papersdescribe research inprogress by the author(s) and are published toelicit comments and to encourage debate.The views expressed in IMF Working Papers arethose of the author(s) and do not necessarilyrepresent the views of the IMF, its Executive Board,or IMF management. 2025APR IMF Working PaperResearch Department K Wasn’t Built in a Day: Investment with Endogenous Time to BuildPrepared by Adriano Fernandes and Rodolfo Rigato* Authorized for distribution by Maria Soledad Martinez PeriaApril2025 IMF Working Papersdescribe research in progress by the author(s) and are published to elicitcomments and to encourage debate.The views expressed in IMF Working Papers are those of theauthor(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT:Physical capital takes time to build. Yet, the measurement of time to build and of its response tofirm 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 thatfirms accelerate ongoing projects and start fewer new projects when credit dries up. We rationalize our findingswith a novel model of endogenous time to build. A credit crunch increases firm appetite for immediate relative todelayed cash flows. Firms then accelerate projects closer to completion and postpone unbegun projects. Such amechanism is borne out in the data: projects proxied to be more mature are sped up the most. We quantify ourmodel to match our causal estimates, and the joint distribution of project costs and gestation lags. Endogenoustime to build generates endogenous amplification and state-dependence of investment on the distribution ofprojects along completion stages. Endogenous time to build is policy relevant. Contractionary monetary policyfaces headwinds when the distribution of projects skews towards mature projects. Tax policy, in turn, can flexiblyreshuffle investment expenditures over time with tax credits. * We are indebted to our advisors Gabriel Chodorow-Reich, Samuel Hanson, Jeremy Stein, and Ludwig Straub for their invaluablesupport.WearegratefultoVeronicaDeFalco,NamrataNarain,LouisePaul-DelvauxandAdiSunderamforcontinuousencouragement and suggestions. We would also like to thank Andy Abel, Pol Antràs, Patrick Bajari, Robert Barro, Adrien Bilal, MichaelBlank, Emily Breza, John Campbell, Pedro Degiovanni, Gio-vanni Dell’Ariccia, Jan Eberly, Martin Eichenbaum, Ester Faia, XavierGabaix, Shresth Garg, Edward Glaeser, Christian Hellwig, Myrto Kalouptsidi, Stephanie Kestelman, Divya Kirti, Greg Lewis, KarenLewis, Debbie Lu-cas, Greg Mankiw, Ross Mattheis, Bob McDonald, Max Miller, Ariel Pakes, Dev Patel, Maria Soledad MartinezPeria, Elie Tamer, Audrey Tiew, Boris Valleé, Tom Winberry, Christian Wolf, Lingxuan Wu, and numerous sem-inar participants atBoston College, CREI, Fed Board, ECB, Harvard, IMF, NBER Summer Institute, SF Fed, STEG-CEPR, TSE, UT Austin McCombs,Wharton, and the Winter SED Meetings for their helpful insights. We thank Samuel Efraim, Harold Klapper, and Johnathan Sun foroutstanding research assistance; and João Mene-gotto for stellar research assistance. Adriano Fernandes recognizes financialsupport during his graduate studies from the Molly and Domenic Ferrante Economics Research Fund on Monetary and Fiscal Policy(Harvard Eco-nomics Department), and from the Center for International Development (Harvard Kennedy School). K Wasn’t Built in a Day Investment with Endogenous Time to Build Prepared by Adriano Fernandes and Rodolfo Rigato 1Introduction Physical capital takes time to build. Anecdotal evidence abounds: factories, power plants,sewers, ships, the list goes on. More than an anecdotal fact, time to build is a defining featureof capital formation. It is entwined with investment decisions. A firm experiencing a periodof high demand may benefit from building a new plant.Whether to invest depends onwhether demand will remain high by the time the plant is finished. Time to build shapes in-vestment. But what if the firm was already building a plant when demand picked up? Couldthe firmchooseto speed up construction, even if costly, to take advantage of good times? Oris time to build an exogenous technological constant that firms must simply accept? The central assertion – and empirical finding – of this paper is that time to build is anendogenous choiceof firms. Investment shapes time to build. We study the resulting conse-quences for capital budgeting, investment fluctuations and economic policy. The US during World War II provides plenty of examples (Vogel, 2007). The Pentagon’sconstruction was accelerated relative to its original schedule (Goldberg, 1992), with workerson site around the clock. “Speed costs money, though: ini