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Direct investment: a doubtful alternative to international debt

  • Harold L. Cole
  • William B. English

The paper considers a model in which private foreign investors make direct long-lived capital investments in a small developing country that is subject to stochastic shocks to production. Depending upon the preferences of the host country, we find that expropriation can occur because of either desperation or opportunism. We show that under reasonable assumptions, increased investment makes expropriation less likely to occur and that the level of investment chosen by atomistic foreign investors may be nonoptimal.

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1992)
Issue (Month): Win ()
Pages: 12-22

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Handle: RePEc:fip:fedmqr:y:1992:i:win:p:12-22:n:v.16no.1
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  1. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
  2. Cole, Harold L. & English, William B., 1991. "Expropriation and direct investment," Journal of International Economics, Elsevier, vol. 30(3-4), pages 201-227, May.
  3. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  4. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
  5. Worrall, Tim, 1990. "Debt with potential repudiation," European Economic Review, Elsevier, vol. 34(5), pages 1099-1109, July.
  6. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  7. Jonathan Eaton & Mark Gersovitz, 1982. "A Theory of Expropriation and Deviations From Perfect Capital Mobility," NBER Working Papers 0972, National Bureau of Economic Research, Inc.
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