Political Risk and Irreversible Investment
AbstractThe objective of this paper is twofold. First, we develop a theoretical model to investigate the impact of political risk on irreversible investment. Second, we apply our model to an analysis of the effects of risk of separation of the province of Quebec from the Canadian federation. We model the probability of a regime switch using the properties of the electoral process and examine the response of investment to changes in the risk of separation. We consider the impact of investors’ perception of the risk of separation and financial market volatility separately. We show that political risk has a depressing impact on investment even if the "bad" regime has never been observed in the sample.
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Bibliographic InfoPaper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 0707.
Length: 51 pages
Date of creation: May 2007
Date of revision:
Irreversible investment; political risk; regime shifts; Quebec investment; Canada;
Other versions of this item:
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-MAC-2007-11-17 (Macroeconomics)
- NEP-POL-2007-11-17 (Positive Political Economics)
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