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. Copyright 1999 by The editors of the Scandinavian Journal of Economics.
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Volume (Year): 101 (1999) Issue (Month): 3 (September) Pages: 459-75 Download reference. The following formats are available: HTML
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Johannes Münster, 2006.
"Contests with Investment,"
Discussion Papers
120, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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