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Discount Factors And Thresholds: Foreign Investment When Enforcement Is Imperfect

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  • Asiedu, Elizabeth
  • Villamil, Anne P.
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    Abstract

    We 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 Info

    Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

    Volume (Year): 4 (2000)
    Issue (Month): 01 (March)
    Pages: 1-21

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    Handle: RePEc:cup:macdyn:v:4:y:2000:i:01:p:1-21_01

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    Cited by:
    1. Sergio Mayordomo & María Rodríguez-Moreno & Juan Ignacio Peña, 2012. "Portfolio Choice with Indivisible and Illiquid Housing Assets: The Case of Spain," Faculty Working Papers 24/12, School of Economics and Business Administration, University of Navarra.
    2. Wezel, Torsten, 2004. "Does co-financing by multilateral development banks increase "risky" direct investment in emerging markets?," Discussion Paper Series 1: Economic Studies 2004,02, Deutsche Bundesbank, Research Centre.
    3. Asiedu, Elizabeth, 2003. "Debt relief and institutional reform: a focus on Heavily Indebted Poor Countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(4), pages 614-626.
    4. Asiedu, Elizabeth, 2005. "Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability," Working Paper Series RP2005/24, World Institute for Development Economic Research (UNU-WIDER).

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