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Expropriation risk, investment decisions and economic sectors

Listed author(s):
  • Población, Javier
  • Restrepo Ochoa, Diana Constanza
  • Peña Sánchez de Rivera, Juan Ignacio
  • Vaz Antunes Pereira Correia, José Ricardo

We build a Real Options model to assess the importance of private provisionand the impact of expropriation risk on investment timing, investmentvolumes, governmental costs and social welfare. We consider two types ofbusinesses (essential and non essential businesses) and two stages (operatingand investment opportunities), and answer questions regarding three maintopics: the firm's reaction to expropriation risk, the government drivers toexpropriate, and the costs this generates in terms of welfare. We find thatthe firm makes suboptimal investment decisions. When we endogenize thereputational costs of expropriation, results show that the decision of the governmentregarding the level of political risk will largely depend on the typeof business. However, in terms of welfare it is never optimal to expropriate

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Paper provided by Universidad Carlos III de Madrid. Departamento de Economía de la Empresa in its series DEE - Working Papers. Business Economics. WB with number wb142309.

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Date of creation: Sep 2014
Handle: RePEc:cte:wbrepe:wb142309
Contact details of provider: Web page: http://www.business.uc3m.es/es/index

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  1. repec:hrv:faseco:33077889 is not listed on IDEAS
  2. Lensink, Robert & Hermes, Niels & Murinde, Victor, 2000. "Capital flight and political risk," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 73-92, February.
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  18. Clark, Ephraim, 1997. "Valuing political risk," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 477-490, June.
  19. Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, vol. 26(7), pages 1299-1314, July.
  20. Eaton, Jonathan & Gersovitz, Mark, 1984. "A Theory of Expropriation and Deviations from Perfect Capital Mobility," Economic Journal, Royal Economic Society, vol. 94(373), pages 16-40, March.
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  22. Nordal, Kjell B., 2001. "Country risk, country risk indices and valuation of FDI: a real options approach," Emerging Markets Review, Elsevier, vol. 2(3), pages 197-217, September.
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