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Private Investment and Political Uncertainty

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  • David Stasavage

Abstract

Recent theoretical and empirical work has demonstrated a clear negative link between macroeconomic and political uncertainty and levels of private investment across countries. This result raises the question what institutions might help reduce this uncertainty, in particular by allowing host governments to limit their own possibilities to act opportunistically with respect to investors. Some have argued that governments might benefit from joining a multilateral investment agreement, but there remain doubts both about the enforceability and the desirability of such an accord. An alternative possibility, proposed in a seminal article by North and Weingast (1989), is that political institutions characterized by checks and balances can allow governments to credibly commit not to engage in ex post opportunism with respect to investors. In this paper I propose a modified version of this hypothesis and test it using new cross-country data on political institutions. I also use a quantile regression technique which allows the estimated effect of political institutions to vary across countries and over time.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers with number 25.

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Date of creation: Jul 2000
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Handle: RePEc:cep:stidep:25

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

Related research

Keywords: Political institutions; private investment; credible commitment; quantile regression.;

References

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Cited by:
  1. Hefeker, Carsten & Busse, Matthias, 2005. "Political Risk, Institutions and Foreign Direct Investment," HWWA Discussion Papers 315, Hamburg Institute of International Economics (HWWA).
  2. Pablo Astorga, 2009. "A Century of Economic Growth in Latin America," Oxford University Economic and Social History Series _075, Economics Group, Nuffield College, University of Oxford.
  3. Justesen, Mogens K. & Kurrild-Klitgaard, Peter, 2007. "The constitution of economic growth: Testing the prosperity effects of a Madisonian model on a panel of countries 1980‐2000," MPRA Paper 36063, University Library of Munich, Germany.
  4. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
  5. Dino Falaschetti, 2004. "Can Voting Reduce Welfare? Evidence from the US Telecommunications Sector," Public Economics 0401006, EconWPA.
  6. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2011. "Fundamentals, Financial Factors, and the Dynamics of Investment in Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(0), pages 88-105, May.
  7. Witold J. Henisz & Bennet A. Zelner & Mauro F. Guillen, 2004. "International Coercion, Emulation and Policy Diffusion: Market-Oriented Infrastructure Reforms, 1977-1999," William Davidson Institute Working Papers Series 2004-713, William Davidson Institute at the University of Michigan.
  8. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Asset prices, Credit and Investment in Emerging Markets," NIPE Working Papers 18/2009, NIPE - Universidade do Minho.
  9. Thomas Farole & Andrés Rodríguez-Pose & Michael Storper, 2007. "Social capital, rules, and institutions: A cross-country investigation," Working Papers 2007-12, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  10. Dino Falaschetti, 2004. "Can Voting Reduce Welfare? Evidence from the US Telecommunications Sector," Public Economics 0401009, EconWPA.
  11. Philipp an de Meulen, 2011. "Labor Heterogeneity and the Risk of Expropriation in Less Developed Countries," Ruhr Economic Papers 0298, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  12. World Bank, 2007. "Zanzibar - The Effect of the Investment Climate on Performance of Micro and Small Enterprise in Zanzibar : A Comparison with Mainland Tanzania and Other Countries," World Bank Other Operational Studies 7708, The World Bank.
  13. Mohammad Amin & Priya Ranjan, 2008. "When Does Legal Origin Matter?," Working Papers 080912, University of California-Irvine, Department of Economics.
  14. Canes-Wrone, Brandice & Park, Jee-Kwang, 2010. "Electoral Business Cycles in OECD Countries," Papers 9-12-2010a, Princeton University, Research Program in Political Economy.
  15. Dino Falaschetti, 2003. "Voter Turnout, Regulatory Commitment, and Capital Accumulation: Evidence from the US Telecommunications Sector," Microeconomics 0311002, EconWPA.
  16. Dino Falaschetti, 2003. "Does Partisan Heritage Matter? The Case of the Federal Reserve," Microeconomics 0311003, EconWPA.
  17. Ahmad, Imtiaz & Qayyum, Abdul, 2008. "Effect of Government Spending and Macro-Economic Uncertainty on Private Investment in Services Sector: Evidence from Pakistan," MPRA Paper 11673, University Library of Munich, Germany.
  18. Martínez, Juan & Santiso, Javier, 2003. "Financial Markets and Politics: The Confidence Game in Latin American Emerging Economies," MPRA Paper 12909, University Library of Munich, Germany.
  19. Steve Bond & Stephen R. Bond & Adeel Malik, 2008. "Natural resources, export structure and investment," Economics Series Working Papers CSAE WPS/2008-20, University of Oxford, Department of Economics.
  20. Mark Koyama, 2010. "The political economy of expulsion: the regulation of Jewish moneylending in medieval England," Constitutional Political Economy, Springer, vol. 21(4), pages 374-406, December.

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