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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and Related Disciplines, LSE in its series STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers with number 25.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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  1. Clague, Christopher & Keefer, Philip & Knack, Stephen & Olson, Mancur, 1996. "Property and Contract Rights in Autocracies and Democracies," MPRA Paper 25720, University Library of Munich, Germany.
  2. Joshua Aizenman & Nancy P. Marion, 1996. "Volatility and the Investment Response," NBER Working Papers 5841, National Bureau of Economic Research, Inc.
  3. Hélène Poirson, 1998. "Economic Security, Private Investment, and Growth in Developing Countries," IMF Working Papers 98/4, International Monetary Fund.
  4. Serven, Luis, 1997. "Irreversibility, Uncertainty and Private Investment: Analytical Issues and Some Lessons for Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 229-68, Supplemen.
  5. Pritchett, Lant, 1998. "Patterns of economic growth : hills, plateaus, mountains, and plains," Policy Research Working Paper Series 1947, The World Bank.
  6. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-93, May.
  7. Donald Robertson & James Symons, 1991. "Some Strange Properties of Panel Data Estimators," CEP Discussion Papers dp0044, Centre for Economic Performance, LSE.
  8. Barro, Robert J, 1996. " Democracy and Growth," Journal of Economic Growth, Springer, vol. 1(1), pages 1-27, March.
  9. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  10. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
  11. Alesina, Alberto & Perotti, Roberto, 1994. "The Political Economy of Growth: A Critical Survey of the Recent Literature," World Bank Economic Review, World Bank Group, vol. 8(3), pages 351-71, September.
  12. Clague, Christopher, et al, 1996. " Property and Contract Rights in Autocracies and Democracies," Journal of Economic Growth, Springer, vol. 1(2), pages 243-76, June.
  13. Serven, Luis & Solimano, Andres, 1993. "Debt crisis, adjustment policies and capital formation in developing countries: Where do we stand?," World Development, Elsevier, vol. 21(1), pages 127-140, January.
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