Capital budgeting, uncertainty, and misallocation

In canonical models of investment dynamics under uncertainty, "time -to -build" in investment decisions implies that uncertainty negatively impacts firm values and aggregate capital productivity. However, capital budgeting, which involves ex -ante information acquisition and state -contingent investment decisions, can potentially ameliorate time -to -build frictions. Reduced -form evidence using firm -level data on sales and investment expectations and errors supports both mechanisms. Incorporating capital budgeting into a standard investment model, our calibrated model reveals that state -contingent investment planning and information acquisition reduce aggregate productivity losses by 41% and 17%, respectively. Moreover, gains from planning accrue primarily to less productive firms, while information acquisition benefits higher productivity ones.