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Investors Facing Opportunistic Governments: Is it Really Good to “Know the Market” before Investing?

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  • Michaela Erbenová
  • Steinar Vagstad

Abstract

When a government cannot commit to future policies, investors face the risk of opportunistic behavior in addition to uncertain market conditions. We show that although reducing market uncertainty is sometimes essential for investment, it may aggravate problems of opportunism. The better informed the investor is before investing, the more information the government can infer from observing that investment takes place, in turn enabling more efficient rent extraction. This signaling effect can dominate; if the investor receives “too accurate” information before investing, the only equilibrium is the one in which no investment occurs. JEL classification: D82; L51

Suggested Citation

  • Michaela Erbenová & Steinar Vagstad, 1999. "Investors Facing Opportunistic Governments: Is it Really Good to “Know the Market” before Investing?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 459-475, September.
    • Handle: RePEc:bla:scandj:v:101:y:1999:i:3:p:459-475
    DOI: 10.1111/1467-9442.00166
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    Cited by:

    1. Kjerstad, Egil & Vagstad, Steinar, 2000. "Procurement auctions with entry of bidders," International Journal of Industrial Organization, Elsevier, vol. 18(8), pages 1243-1257, December.
    2. Münster, Johannes, 2006. "Contests with investment [Wettkämpfe mit Investitionen]," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-09, WZB Berlin Social Science Center.
    3. Sumru Altug & Fanny S. Demers & Michel Demers, 2004. "Tax Policy and Irreversible Investment," CDMA Working Paper Series 200404, Centre for Dynamic Macroeconomic Analysis.
    4. Münster, Johannes, 2006. "Contests with Investment," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 120, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Lommerud, Kjell Erik & Olsen, Trond E. & Straume, Odd Rune, 2006. "Cross border mergers and strategic trade policy with two-part taxation: is international policy coordination beneficial? [Grenzüberschreitende Fusionen und strategische Handelspolitik mit zweiseiti," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-24, WZB Berlin Social Science Center.
    6. Johannes Münster, 2007. "Contests with investment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 849-862.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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