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Design of investment promotion policies


  • Kartasheva, Anastasia V.


Over the last 20years, developing countries have experienced the massive shift of financing and the operation of infrastructure from the public to the private sector. The paper analyzes how the government agency should structure the investment promotion policy. I develop a sequential contracting model between the government, investors and infrastructure providers and derive several properties of the optimal policy. The policy leaves investors uncertain about the project type and prescribes different levels of government support, in the form of tax or price distortions. However, the optimal policy does not change the expectations of investors about distribution of project returns. I characterize how the optimal policy depends on the revenue generation preferences of the government and the profitability of infrastructure projects in the country.

Suggested Citation

  • Kartasheva, Anastasia V., 2012. "Design of investment promotion policies," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 127-136.
  • Handle: RePEc:eee:indorg:v:30:y:2012:i:2:p:127-136 DOI: 10.1016/j.ijindorg.2011.04.005

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    References listed on IDEAS

    1. Morisset, Jacques, 2003. "Does a country need a promotion agency to attract foreign direct investment : a small analytical model applied to 58 countries," Policy Research Working Paper Series 3028, The World Bank.
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    12. Estache, Antonio, 2004. "Emerging infrastructure policy issues in developing countries - a survey of the recent economic literature," Policy Research Working Paper Series 3442, The World Bank.
    13. J. Luis Guasch & Jean-Jacques Laffont & Stéphane Straub, 2007. "Concessions of infrastructure in Latin America: Government-led renegotiation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1267-1294.
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    17. J. Guasch & Jean-Jacques Laffont & Stéphane Straub, 2006. "Renegotiation of Concession Contracts: A Theoretical Approach," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 55-73, September.
    18. Rioja, Felix K., 2003. "Filling potholes: macroeconomic effects of maintenance versus new investments in public infrastructure," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2281-2304, September.
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    Cited by:

    1. David Martimort & Flavio Menezes & Myrna Wooders & DANIEL DANAU & ANNALISA VINELLA, 2015. "Public-Private Contracting under Limited Commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 78-110, February.

    More about this item


    Infrastructure financing; Sequential mechanisms; Investment promotion; Information disclosure;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy


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