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Investors Facing Opportunistic Governments: Is It Really Good to "Know the Market" before Investing?

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  • Erbenova, Michaela
  • Vagstad, Steinar

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. Copyright 1999 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 101 (1999)
Issue (Month): 3 (September)
Pages: 459-75

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Handle: RePEc:bla:scandj:v:101:y:1999:i:3:p:459-75

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Sumru Altug & Fanny S. Demers & Michel Demers, 2004. "Tax Policy and Irreversible Investment," CDMA Working Paper Series 200404, Centre for Dynamic Macroeconomic Analysis.
  2. Johannes Münster, 2007. "Contests with investment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 849-862.
  3. 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.
  4. 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?," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-24, Social Science Research Center Berlin (WZB).
  5. Münster, Johannes, 2006. "Contests with investment," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-09, Social Science Research Center Berlin (WZB).

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