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Political Risk and Irreversible Investment

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Author Info

  • Sumru G. Altuğ

    ()
    (Department of Economics, Koç University; Center for Economic Policy Research, London.)

  • Fanny S. Demers
  • Michel Demers

Abstract

The 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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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_0707.pdf
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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 0707.

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Length: 51 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:koc:wpaper:0707

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Keywords: Irreversible investment; political risk; regime shifts; Quebec investment; Canada;

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References

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  1. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
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Cited by:
  1. Marvasti, Akbar, 2013. "The role of price expectations and legal uncertainties in ocean mineral, exploration activities," Resources Policy, Elsevier, vol. 38(1), pages 68-74.
  2. Wahl, Jack E. & Broll, Udo, 2009. "Mitigation of foreign Direct investment risk and hedging," Dresden Discussion Paper Series in Economics 13/09, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  3. Dearmon, Jacob & Grier, Robin, 2011. "Trust and the accumulation of physical and human capital," European Journal of Political Economy, Elsevier, vol. 27(3), pages 507-519, September.
  4. Altug, Sumru & Demers, Fanny S. & Demers, Michel, 2009. "The investment tax credit and irreversible investment," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 509-522, December.
  5. Amihai Glazer & Stef Proost, 2008. "Signaling Commitment by Excessive Spending," Working Papers 070811, University of California-Irvine, Department of Economics.
  6. Altug, Sumru G. & Filiztekin, Alpay & Pamuk, Sevket, 2007. "The Sources of Long-term Economic Growth for Turkey, 1880-2005," CEPR Discussion Papers 6463, C.E.P.R. Discussion Papers.

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