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Time to Build and the Real-Options Channel of Residential Investment

JOURNAL OF FINANCIAL ECONOMICS2020-01

Oh, Hyunseung | Yoon, Chamna

A standard real-options model predicts that time-to-build investment decisions could be delayed by uncertainty over future revenue. This paper examines the first-order importance of this mechanism by looking into the micro-data for residential construction during the recent housing boom and bust. We develop a model of sequential irreversible investment with stochastic bottlenecks and estimate the model parameters based on the distribution of time-to-build and new house prices. In the estimated model, the boom period increase in time-to-build is caused by frequent construction bottlenecks, and the decrease in house prices and the increase in uncertainty during the bust generated further delays in construction.

Publisher
ELSEVIER SCIENCE SA
Issue Date
2020-01
Article Type
Article
Citation
JOURNAL OF FINANCIAL ECONOMICS, Vol.135, No.11, pp.255 - 269
ISSN
0304-405X
DOI
10.2139/ssrn.2644428
Contact : Joo, Sunhee ( shjoo2006@kaist.ac.kr )

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