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Institutions, volatility and investment

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  • Besley, Timothy
  • Mueller, Hannes

Abstract

Countries with strong executive constraints have lower growth volatility but similar average growth to those with weak constraints. This paper argues that this may explain the relationship between executive constraints and inflows of foreign investment. It uses a a novel dataset of Dutch sector-level investments between 1983 and 2012 to explore this issue. It formulates an economic model of investment and uses data on the mean and variance of productivity growth to explain the relationship between investment inflows and executive constraints. The model can account for the aggregate change in inflows when strong executive constraints are adopted in terms of the reduction in the volatility in productivity growth. The data and model together suggest a natural way of thinking about country-level heterogeneity in investment inflows following the adoption of strong executive constraints.

Suggested Citation

  • Besley, Timothy & Mueller, Hannes, 2018. "Institutions, volatility and investment," LSE Research Online Documents on Economics 69586, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:69586
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    Cited by:

    1. Tarek A Hassan & Stephan Hollander & Laurence van Lent & Ahmed Tahoun, 2019. "Firm-Level Political Risk: Measurement and Effects," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 2135-2202.
    2. Timothy Besley & Marta Reynal-Querol, 2017. "The logic of hereditary rule: theory and evidence," Journal of Economic Growth, Springer, vol. 22(2), pages 123-144, June.
    3. Alvaro Forteza & Juan S. Pereyra, 2021. "Separation of powers with ideological parties," Journal of Theoretical Politics, , vol. 33(3), pages 333-382, July.
    4. D. V. Shcherbakova & A. A. Medved, 2019. "Factors of Investment Attractiveness of Russian Regions," Administrative Consulting, Russian Presidential Academy of National Economy and Public Administration. North-West Institute of Management., issue 11.
    5. Morelli, Massimo & Foarta, Dana, 2020. "Equilibrium Reforms and Endogenous Complexity," CEPR Discussion Papers 15136, C.E.P.R. Discussion Papers.
    6. María Clara Arroyo, 2018. "The Effect of Executive Constraints on Reform Implementation: An Empirical Analysis," Documentos de Trabajo (working papers) 0118, Department of Economics - dECON.
    7. Loris Rubini, 2019. "Bribes in the Business Cycles," Review of Economics and Institutions, Università di Perugia, vol. 10(1).

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    More about this item

    Keywords

    foreign investment; volatility risk; executive constraints; democracy;
    All these keywords.

    JEL classification:

    • N0 - Economic History - - General
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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