Discount Factors And Thresholds: Foreign Investment When Enforcement Is Imperfect
AbstractWe consider a model that provides insight into thewell-known Folk theorem in economics that when the discountfactor is sufficiently close to 1, expropriation willnever occur. Although this Folk theorem is true in our model,our perspective is different. The discount factor often is described as a deep structural parameter that is difficultto alter at a point in time. In contrast, we analyze thedeterminants of two thresholds and *that segment the unit interval on which is defined into threesubintervals. These subintervals correspond to the three possibleequilibria for investment flows: autarky, underinvestment, andunconstrained optimal investment. These thresholds are ofinterest because they can be altered by specific policyinterventions. As a consequence, even if is small, some level offoreign investment can be supported. We construct measures of for 40 countries, characterize and *, and discuss recent trends in investment flows.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Macroeconomic Dynamics.
Volume (Year): 4 (2000)
Issue (Month): 01 (March)
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