Toward longer investment: Is an inclusive regime always better than an authoritarian one?

Recent evidence shows that large-scale capital outflows have occurred in emerging economies, such as China and Russia. We thus conduct a theoretical analysis comparing the performance of authoritarian and inclusive regimes in keeping international capital within borders as long as possible. We arrive at the following conclusions, revealing that institutional factors play a more critical role than tax policy: for an authoritarian regime to dominate an inclusive one, a lower degree of government transparency must be accompanied by a lower degree of capital mobility; an inclusive regime dominates an authoritarian one as long as capital is sufficiently mobile. Moreover, we provide a rationale for the following order of institutional change in open economies: before liberalizing capital accounts, an inclusive, transparent government should be established; otherwise, an authoritarian, opaque government could prevail when the exit cost is sufficiently high or the degree of capital mobility is sufficiently low.